Is multi-family really better than single-family?

Photo by Christina Morillo from Pexels

The “one-size fits-all” claim that multi-family is always the right answer is false. As always, it depends on the tenant pool the property attracts. I will explain.

There is a one-to-one relationship between the property characteristics and the specific tenant pool segment willing and able to rent a specific property. Each tenant segment has different characteristics, including average length of stay.

Most people who occupy 4-plexes in Las Vegas have an average stay of 9 months. The typical between-tenant repair/renovation cost is about $2500, according to the property managers I polled. The average stay for our tenant segment (typically occupying single-family homes) is over five years. The typical turn cost is about $500.

Which one will make you more money?

The average asking price for the 47 4-plexes for sale in Las Vegas today is about $650,000. That is the equivalent cost of 2 SFR properties similar to the properties we target.

Below I compared one 4-plex with an average tenant stay of 1 year (I errored high to be conservative) and a between-tenant renovation cost of $2,000 (again to be conservative.) to two SFRs that fit our profile. The average rent for the 47 properties for sale as of 12/31/2022 is $850. I choose $900 to be conservative. The average rent for the properties we target is about $2,100, I used $2,000.

As you can see, over a hold time of 10 years, the gross cash flow from the 4-plex (after vacancy cost) is $264,000. The gross cash flow from the 2 SFR properties (after vacancy cost) is $470,000.

As a real-world example, I owned a 4-plex in Houston similar to the 4-plexes in Las Vegas. On paper, they were a cash cow. Once I took skips, evictions, frequent tenant turns, and lost rent to non-paying tenants, I only lost about $1,000/Yr after-tax benefits and did all maintenance myself.

I purchased two 4-plexes in Atlanta. The tenants who occupied the properties were similar to the tenant segment we target today. Rent was always paid on schedule, with no skips and no evictions. I made good money on those properties.

The difference is the tenant pool segments the properties attracted. So, instead of a simplistic one-size-fits-all approach, you need to look at the probable rent based on the tenant segment the property attracts.

Due diligence, not dogma.