JF2349: Single Family Or Multifamily With Lee Kiser #SituationSaturday
Lee Kiser was on a previous episode JF1694 so make sure to go listen to get his best ever advice on that episode. A little bit about Lee, he is a principal and managing broker of Kiser Group, and today he will be sharing with you which option you should focus on, single vs multifamily investing.
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“Going for single-family or multifamily will depend on your goals & what you are trying to accomplish” – Lee Kiser
Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless. This is the world’s longest-running daily real estate investing podcast where we only talk about the best advice ever. We don’t get into any of that fluffy stuff. And well first off, I hope you’re having a Best Ever weekend. Because today is Saturday, we’ve got a special segment, Situation Saturday. And here is the situation. You’re trying to decide between single-family or multifamily. What are you going to do? How do you decide if you’re going to start or continue with single-family or do multi-family? And with us today to talk us through a thought process for how to decide between the two, Lee Kiser. How are you doing Lee?
Lee Kiser: I’m doing well. How are you, Joe?
Joe Fairless: I’m glad to hear that, and I’m doing well as well. A little refresher about Lee. He’s been on the show, Episode 1694. You can go listen to his Best Ever advice on that episode. So we’re going to stay focused on the topic at hand today. A little bit about Lee. He’s a principal and managing broker of the Kiser Group. Before starting Kiser Group he was a top producing apartment broker in Chicago at his brokerage. He’s still based in Chicago. So let’s talk about it… Single-family versus multi-family. What are your thoughts?
Lee Kiser: Well, my thoughts are it really depends on what your goals are with investing and how much you want this to be sideline versus primary business. And pros and cons… Pretty much, the pros for doing single-family are the cons for doing multi-family, and vice versa, in my opinion.
Joe Fairless: Like what? What would be some pros for single-family?
Lee Kiser: Well, how much cash do you need to make an investment in a rental property? And not always, but most typically, single-family homes are less expensive and usually have higher leverage available, meaning you get a higher loan relative to your acquisition price than our apartment buildings in the same area markets. And I’m not talking about a two flat versus a single-family, I’m talking about a multi-unit, a six flat or larger versus a single-family home. And if you’re buying it for investment reasons and renting it out, a single-family home, you can most likely get 80% leverage on that from a lender. Depending on the local rules with lenders, you may be able to leverage it higher than that… Which means, if you can get that loan for it, then how much cash do you need? How much equity do you need to use to buy it?
Versus an apartment building – right now, typically, the highest you can get is 80% leverage. Right now with COVID and recent changes, it’s really 75%. And if you’re a newer investor, you’re probably going to suffer on your loan-to-value there some more. So you probably look at 70% loan-to-value, which means you’ll need 30% of your acquisition price for the cash to buy the deal. And typically, that’s just simply a lot more cash when you look at the price of the building, and then the leverage available. A lot more cash that you would need to buy an apartment building. So a pro in my mind for single-family is the con for multifamily, is how much cash you need to buy an investment property.
Joe Fairless: Okay. And I don’t think it’s any secret that you and I are both focused on commercial real estate. So we do have a dog in the fight. And it is tough to be unbiased… But I’m going to do my best to be unbiased, because I have invested in single-family homes, and I assume you have as well. So let’s just keep on the pros section of single-family homes. You mentioned less cash. You mentioned higher leverage. What about better discounts? Because you’ve got less sophistication from the seller standpoint, than larger properties.
Lee Kiser: Yeah. To me Joe, the discounts all have to do with supply and demand. And for the last decade, multi-family has been in pretty high investor demand; there’s more demand than supply. The big econ 101, duh… That means it’s going to be a higher price, and therefore a lower return. So I would say relative to the single-family market, yeah, that’s another pro for investing in single-family homes, is that there’s more of an equilibrium between supply and demand, which helps keep valuations more in check, theoretically, meaning you could get a better return sometimes from a single-family home investment. But I think that’s isolating that particular issue in a vacuum… Because I think when you look at some of the pros of multifamily, which we haven’t gotten to yet, then it begins to mitigate that return as a potential pro for single-family… But the pro for single-family is – yeah, there’s generally not as much demand for it as multi-family. So relative to valuation, it’s probably cheaper.
Joe Fairless: What about liquidity? I no longer own single-family homes, besides for personal reasons; but as from an investment property standpoint, I don’t own any single-family home investment properties. I sold them all in October 2019. And when I decided to sell them, they were sold in about three months. There was only three of them, but it was quick, it was easy. I worked with a real estate agent who happened to be my sister, and sold them; liquid, nice, done, moving on. Apartment buildings, if I want to quickly sell three apartment buildings I’m a general partner on, it’s more complicated. So what about liquidity? Would that be a pro on single-family homes?
Lee Kiser: I think liquidity, if you’re looking at a single asset, I would agree. Or if you have a portfolio of assets, but you’re marketing them individually when you’re exiting, then yeah. I think – back to that old supply and demand topic we just talked about previously, you’ll be competing with a lot of other single-family homes on the market, but there’s also a large demand. And it’s simply making the right matches. I think if you own a large enough portfolio of single-family homes, and you’re only interested in exiting as a portfolio, I think you’ll find it may be more difficult than exiting an apartment building.
Joe Fairless: That makes a lot of sense. What would you say that number is, of homes in a portfolio where then it’s like you’re starting to actually to be harder to sell than an apartment building because of all these homes that you’ve got?
Lee Kiser: Sounds like you’re asking me what a con is Joe, and I just want to make sure I’m following the lead, correct?
Joe Fairless: Oh, fair enough. You got me.
Lee Kiser: So I wish it were that easy to say, “Okay, here’s the threshold. And if you have more than five, it’s going to be more difficult.” Now, one of the con is management. And to understand the con, you have to look at the pro. So in multi-family, you have several units under one roof, it’s all one location, and you have multiple tenants. And that is what is attractive to an investor, and that’s also what makes that property easier to manage. You have one mechanical system, you have one person who’s going to do your maintenance and repair, one location to send them. It’s simply a more efficient management. Contrary, if you look at a portfolio of single-family homes, then the geographic concentration of those would be very important if they were a grouping, and you’re looking at a portfolio and an investor to take out everything.
When it’s scattered-site, meaning over a large geographic distribution, then I think it is a different equation. If you had five single-family homes you’re trying to sell and they’re in the same county, but they’re in five different towns or five different areas, it’s a very different equation than if you had 10 single-family homes in a three-block radius. And I think that’s more important with your question. So it’s not really a number, but there are other factors involved.
Joe Fairless: That is such a good point. I hadn’t thought of it in the way that you described, because basically what we’re saying –or what you’re saying, and I completely agree– is if you do single-family homes, here are some benefits for doing so, but don’t have too much success if you want to exit out of this portfolio in a way that attracts a lot of buyers… Unless you want to sell them individually off. Or unless you’re concentrating in a specific area. It’s almost like you can acquire and do well, but don’t do too well unless you follow this specific model of buying.
Lee Kiser: Yeah, and management. That’s something touched on briefly here. In some ways, the management of single-family is easier. So I guess we’ll consider that part a pro… Which is usually you can structure leases that the majority of the upkeep can be put on the tenant. So mowing yards, making minor repairs around the house. So in some ways that management can be shifted to the tenant. But in many ways, it cannot be. Major systems — a gas forced air furnace, or a boiler if it’s an older home, that’s not something that the tenant is going to accept responsibility for, because it’s a capital expenditure that’s going to be a landlord’s expense. And when you think about it, you have one heating plant for a 30 unit building, for 30 houses you have 30 heating plants. And usually, it’s not a system replacement. Usually, it’s a repair item, but that’s still beyond the scope of the tenant or the responsibility of the tenant, so you’re having to send someone in. And it’s simply probabilities. What is the probability that you’re going to have an issue with a heating plant during the winter? What is it? A 10% probability? So you’ll have a 10% probability that your boiler at your apartment building is going to have an issue. But if you have 30 houses, it’s statistically proven, “Okay, you’re gonna have three houses that have a problem.” So it’s budgeting for that and then it’s managing how that gets repaired, who is set. So again, those are things to consider,
Joe Fairless: Before we move into the pro category for apartments, any other pros that you can think of as it relates to homes?
Lee Kiser: No, and I guess that’s why I do what I do for a living.
Joe Fairless: [laughter] Well, you started off the conversation by saying, “Do you want this to be a sideline thing or a primary business?” Which goes to or alludes to the point of a pro for homes is that it can easily be a sideline thing.
Lee Kiser: Yes. So that is a pro. It’s much easier to do on the side, and for some of the reasons we mentioned – some of the management can be transferred, some of the responsibilities can be transferred to the tenant, it’s cheaper usually to get into… So yes, it’s much more of a side business, and I guess that is indeed a pro.
I think another pro may be typically people who are able to buy an investment property kind of already established themselves to some degree, and statistically, higher probability that they actually live in a home. themselves. So I think perhaps it is an understanding of the tenants’ experience and how to run that home or market it, lease it, run the management because you’re more familiar with what that occupant might actually need, because you personally identify. So I guess maybe you call that [unintelligible [00:15:19].12] I guess that’s a pro as well,
Joe Fairless: I like that. You’re better set up for success because you’ve got first-hand experience, or you know others who have it. But most likely, you’ve got first-hand experience if you have lived in a home. Let’s talk about the pros for apartments, because – could you use that same logic to apply for apartment buildings if you have lived in apartments? Or does that not translate?
Lee Kiser: It doesn’t translate as well, because there’s so much going into renting an apartment building, that as a tenant, you’re never aware.
Joe Fairless: True that.
Lee Kiser: Yeah, apartment management can be very complex. And it really is a big thing. That sounds like a con. It’s not to me, because every market we participate in has an industry of third-party management companies for apartment buildings, and some very reputable companies, and if you can hire that service, where you’re probably not going to be able to hire it for a single-family home. So I would say that if that’s the question you’re asking versus me just going off on the pros that I have…
Joe Fairless: Yeah. That makes sense. What are some other pros?
Lee Kiser: We talked about cash needs… But the interesting thing – yes, you’ll need more cash to buy an apartment building. But it’s a whole lot easier to raise that capital from fellow investors for an apartment acquisition than it is for a single-family home. So going out and syndicating or raising that capital, if you have the right plan for the building is typically fairly easy, because there are a whole lot of people who don’t have the option of buying a building themselves, but they have enough cash that they want to invest in something, and their options are going to be very similar to yours – “I’m going to go buy an investment house, or I want to buy a building. If I can’t buy a building, who do I know who is?” It’s in my opinion a lot easier to raise that cash for multifamily acquisition.
Another thing that is really important is occupancy. And let’s flip the coin around and instead call it vacancy. So you own a single-family home and you rent it at a level that you know covers all of your expenses, and for one reason or another you lose your tenant. What is your vacancy rate? It’s 100% vacant. And until you can find a replacement tenant, as the investor, you shoulder the cost of the entire operation.
In a multi-unit building, certainly, occupancy is always a critical component of how you run the building and manage it. But when you inevitably have vacancies, it’s typically much easier to handle, because the costs are spread over multiple units versus just one. And you can actually have a percentage vacancy, and make your decisions on where rents need to be, and how you need to lower them, or how aggressive you can be based on how close to your income need your current revenue is. If you’re 10% vacant, but yet still completely covering all of your expenses, you may want to be aggressive on the rents on those vacant units when you’re marketing them to see where the market is and what the tolerance is for rent for that unit type.
Conversely, if you’re 10% vacant and you know that your second installment tax bill is coming up, you don’t have the right cash in the account right now, whatever, you may also decide, “Let me be less aggressive on those rents, let me lower them, let me get that filled.” But you’ve got that flexibility and it’s spread across a number of units. My main point is that losing a tenant does not affect you nearly the same way in a multi-unit building as it does in a single-family home.
Joe Fairless: And then I would also say a pro would be you make more money on apartment buildings relative to the amount of time that you put in, compared to being focused on single-family. So if I’m focused on single-family for five years, and I’m focused on multifamily for five years, I would be confident in saying that it is highly likely –assuming that both focuses are conservative and a value-add approach– that the multi-family investor is going to make a disproportionately greater amount of money than single-family home investors, because you’re dealing with higher dollar amounts, and cap rates, and being able to increase value through forced appreciation… Versus just some single-family approaches that some of you can add value through force appreciation, but you can’t do it at scale.
Lee Kiser: I think scale is the keyword, I was going to say. It’s an economy of scale question. And multifamily provides an immediate economy of scale. That’s the entire concept. Back to the boiler – am I going to heat one unit with this boiler? One home? Or am I going to heat 30? It’s almost the same size system. So there’s an automatic economy of scale. But you made an interesting comment, Joe, and that was that multi-family makes more money. And I think that’s a question of how you measure that. And by the way, I agree with you. Multi-family makes more money. It’s harder to get into for some of the reasons that we’ve described. But the reason people do it is because it’s more lucrative. But it also depends on how you measure that. And my favorite measure is cash on cash.
So yeah, people will talk about cap rates and they’ll talk about all kinds of ways to measure it. For me, it’s how much cash am I going to put into this investment, be it a home, or an apartment building, or a senior housing center? Any investment. How much cash am I going to have to tie up in this? And at the end of the day, after I’ve paid all of my expenses, and my mortgage, how much cash am I going to have left as profit? And what is the percentage of that cash against what I actually tied up to buy it? And I think when you run that analysis that you will see significantly higher cash on cash returns in multifamily than you do in single-family investments.
Joe Fairless: Anything else that we should talk about as it relates to pros for single-family homes or pros for apartments that we haven’t talked about before we wrap up?
Lee Kiser: Well, I guess this is a pro for single-family and it’s a warning for multifamily investing. The way you determine whether or not something is a good location. So a pro for single-family is you probably know the neighborhood, you probably know the schools, because you probably have some degree of experience with this yourself. And your criteria for deciding whether or not a house is a good investment, you probably have more intuitive knowledge about it. I think that’s a pro.
The con is you may not have that specific knowledge about a multi-family investment from a location standpoint, but you can’t approach it the same way. You need to learn how to determine whether a location is good for multi-family. And the criteria is not whether or not you would live there personally. It’s not an emotional thing. It’s access to public transportation, it’s access to employment, it’s the amenities that the building has relative to its price points, and it’s understanding the demographic of the location and the needs of apartment renters to determine whether or not that’s a good location. So I’d say it’s a con most people don’t start with that knowledge and they only see the investment through the lenses of whether or not they would personally live there, and the pro for single-family is, yeah, you probably have something in your experience silo that gives you an intuition about that location. That’s the only other thing that just came to mind.
Joe Fairless: This was a great conversation. It was great hearing your thoughts. How can the Best Ever listeners learn more about what you’re doing and how to get in touch with you and your company?
Lee Kiser: Go to our website; everything that you would need to know is there and it’s easy to contact us through it. The name of the company is also my last name. People commonly misspell it. So it’s Kiser, not Kaiser, and the URL is kisergroup.com.
Joe Fairless: Lee, thanks for being on the show, talking to us about the pros of single-family home investing and the pros of apartment investing. I think we did a good job of being as objective as we could be… So I’m patting myself on the back and I’m giving you a virtual high five, because for two apartment investing people I think we did a good job of laying out the case for single-family homes too. I hope you have a Best Ever weekend and talk to you again soon.
Lee Kiser: Thanks for having me on again Joe.
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