Are apartments a better investment than single family rentals?
Updated: May 27, 2019
I was talking to a potential investor a few days ago and she asked, "Why apartments? Aren't single family rentals (SFRs) better?" I don't think so - let me elaborate.
If you have an SFR and your tenant moves out, you just went from 100% occupancy to 0%. You also have to incur make-ready costs before you get a new tenant in, which could wipe out your profits for the whole year if the tenant was rough on the house.
In a 100 unit property if one unit vacates...you get the picture.
Say your SFR has a monthly cash flow of $150 after all expenses and debt service. Your water heater goes out and it costs you $1,200 to get it fixed. 8 months' worth of profits were just wiped out. With the apartment, $1,200 is barely a blip in the radar if your annual cash flow is 100 * $150 * 12 = $180,000.
The gold standard in multifamily lending is agency debt from either Fannie Mae or Freddie Mac. Subject to certain exceptions such as gross negligence or fraud, if the property goes belly up the lender will not pursue the borrower personally for outstanding debt. This isn't the case with home loans. Generally you'd have to own a portfolio of multiple SFRs to start qualifying for non-recourse debt.
With a 120+ unit multifamily property you might pay 3.5% to your professional property manager. With SFRs the management fee can approach or even exceed 10%.
These are some of the reasons why multifamily is a superior investment. Multifamily, however, is much more difficult to undertake. It requires far more human, time and financial resources to take down an apartment complex but that's a topic for another time!
Chihiro Kurokawa is founder of BlackRiver Equity Partners, a real estate private equity firm providing private offerings to investors seeking tax-advantaged cash flowing investments in real estate.