Investing in Single-Family vs Multi-FamilySep 07, 2020
The FIG team was recently in Orange County, the Bay Area, and Boise. During our visit, we shared a few thoughts on the pros and cons of owning a single-family investment vs residential multifamily.
In addition to talking about our available projects, and the markets we love to invest in; Steve Olson dove into an intro to the loan comparisons and tax advantages of each asset class.
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Real Estate Investing: Comparing Asset Classes
"If you compare a 4plex to say... a single-family home, which they're great, I have got myself. One of the big advantages of single-family homes is liquidity, with another being financing.
Your mortgage on your house is typically a 30-year fixed-rate mortgage. Which is great. That's pretty desirable. But the downside is—you have one tenant.
If your house is vacant, it's vacant. There's nothing coming in. So you say, well then I'm going to do multifamily. Awesome, we got a bunch of different tenants. A fourplex is not a ton of tenants, but four is better than one. The downside? Commercial financing. Once you get above four units, with commercial financing, what do we have? We have balloon payments in 7 or 10 years. You don't know what the economy's doing in 7 or 10 years.
Right? When you have to refinance or sell, you don't know what's going to be going on that far down the line. And suddenly, what's extra annoying is the commercial lender—they're going to check in with you every six months or every year and do an expense analysis. If your income or your expense ratio has gone out of whack, who knows what they can do. They can do a capital call, they can say we need you to deposit $200,000 with our institution because we're not comfortable with your falling income and expense ratio.
And so you kind of lose some control there. So if we blend these two worlds with a 4plex, we can get true 30-year fixed-rate financing. And as long as you make the payment...no one's looking over your shoulder. Right?
No one's saying hey, you need to make a capital contribution. No one's telling you you've got to pay it off in 7 years. And we'd all agree that 30-years is a nice comfortable timeline, right?
We think okay, no matter what kind of whipsaw we get, generally over a 30 year period (and this is like the most conservative case) where you feel like, I'm going to see some appreciation. I'm gonna see some gains and my rents are going to go up. It's a good comfortable timeline to work with.
So we feel like it's recession-resistant for those reasons. No one's making you pay it off. You got those four tenants, right, that help you service the income. And investors love it! It's accessible. It's a way for the average investor to participate in a little bit bigger of an asset."
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