Why It’s About Single Family Homes

Real estate investing in Kansas City right now is all about the single family homes.  There is more downward pressure, build-in equity and inventory of these properties.

Many of the multi-family investment property owners (duplexes, fourplexes and apartments) have either already failed and fallen into foreclosure or they are continuing to sail along.  Why?  Because while the value of a particular duplex may have dropped, say 5%, the rents still cover all the PITI and expenses if the investment property was purchased on proper fundamentals.  Follow?

But the SFH seller may have lost a job or fallen ill or whatever and they need to either turn the keys in or sell at a steep discount.

Now, being Kansas City, we still haven’t suffered anywhere near what other parts of the country have.  Thank God.  But if I were a real estate investor I’d be looking more in the single family home market than multi-family homes.

13 Comments

Filed under Real Estate Investing

13 responses to “Why It’s About Single Family Homes

  1. Brent

    An interesting take on things. Doesn’t the four loan limitation I keep hearing about (I don’t actually own any rental properties, but I’m thinking about it) limit what you can do here?

    Thanks,
    Brent

  2. Brent – Everything limits what you can do here. 🙂 As a first time investor nowadays you will have to have a minimum investment of 20%. If it’s a multi-family home then it’s 25%…and with the way they structure interest rates they are really trying to get you to put down 30%.

    And four properties is four properties. Regardless of whether they are SFH or multi. Go back into my archives and read up on the advantages of both. You may begin to see what I’m talking about when comparing it to our current fiscal and regulatory policies towards residential real estate investors.

  3. Another Investor

    If prices are coming down, are cap rates going up or are rents coming down as well? With all due respect to the Bawld Guy, the property MUST cash flow to interest me.

  4. We own a 4-plex and in some ways I believe that it’s keeping us alive financially more so than a SFH would. If one unit is vacant, we can still cover our expenses, whereas if we had a SFH then we would be out $1,000 for every month it was vacant.

    Obviously if we could afford to have 4 SFH then we would be better off, but for the price we got the one building for, it was not possible to get multiple SFHs.

    I agree with your point though. I would be happier to be in SFHs at this point.

  5. AI – It’s not so much that prices are coming down as you can cherry pick here and there with SFHs. Where there have been few foreclosures one here or there doesn’t hurt as badly and therefore you have the “built in” equity that allows the SFH to beat the multi family, analysis wise anyway.

    Matthew – As far as I’m concerned you have listed the greatest single benefit of the multi vs. SFH. No question that is a tally firmly on the side of the multi.

    No doubt that you have to have a few months reserves to go into SFH.

  6. You’ve hit another nail on the head, Chris.

    There are anomalies though in selected regions, but they merely prove the rule.

    AI — You’ll not find anything I’ve said promoting properties not paying for themselves, plus a little. There are very rare exceptions, but as I said above, they tend to prove the rule. Investment properties should always stand on their own.

    That said, it begs the question — What is the investor’s end game? Yours is cash flow cuz you’re retired. Someone who’s a long way form retirement needs capital growth far more than a buncha cash flow. They need prudent leverage to the point it allows the property to pay for itself and then some.

    Make sense?

  7. Another Investor

    I understand that cash flow may not be the 30 year old professional’s current objective, but we are in a time when these folks are losing jobs and even with reserves can’t take extended vacancies or declines in rent. In my view, properties need to have comfortable cash flow margins to allow almost any owner to weather the inevitable storms successfully.

    Our cash flow requirements and our definitions of “prudent” leverage probably differ a little, but we are generally on the same page. Make sense?

  8. We’re on the same page. And our idea of prudent leverage nowadays is probably not that different when taken in the context of age/agenda.

  9. Craig

    I Agree.

    I recently completed an extravaganza of KC muli-units hunting, with cash in my pocket a huge desire to buy, but was dissappointed. These guys have survived and there were very few to pick from. I almost get a sense that there were insulated, warm and are going to see what the spring will bring.

    SFH…clearly it’s going to be a long, cold winter and I agree that this is where the discounts are. And if the price is right why not buy two SFHs and call it a duplex?

    I just wished I had figured this out before I wasted my hunting time on Multis and had to leave KC.

  10. Craig, live and learn. If you come back to KC and if you are not tied to an agent, give me a call before you come. 913.568.1579

  11. Hey Chris-
    We are experiencing the same thing up here in Minnesota. Single family homes are selling at $.20-.30 on the dollar versus multi-family at $.70-$.80. Plus, often the SFH tends to be in better shape than the multi-family.

    Most/many of the REO multi-family properties are just junk. Bad repair, huge neglect and often [I hate to say it], should just be torn down!

  12. Here it’s amazing the quality of the multi inventory, too. Not so good. Quality wise, anyway.

  13. Chris, I completely agree with you on the SFH home investment market. Of course I’ve been investing there for several years now… 🙂 It certainly has some disadvantages compared to multifamily, but many of these disadvantages can be overcome. For example, the tenant turnover/occupancy issue can be overcome by using a lease option or contract for deed strategy. The other major objection to SFH is the maintenance, but this again can be overcome w/ LO/CFD. I REALLY like this strategy in this market and as you mentioned you can cherry pick right now. It can be time consuming, however, but quite fun as well!

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