Wake up to a Life of Abundance by Ito Max

Author:Ito, Max [Ito, Max]
Language: eng
Format: epub
Published: 2013-05-25T04:00:00+00:00

SFH vs. Multi-Unit Family Apartment

Some investors prefer multi-unit family apartments to single family homes. They argue like this. If a property is SFH, once it is vacant, it is 100% vacant and its owner needs to pay for its expenses out of his pocket. If a property has four units, once one unit is vacant, it is at 75% occupancy. If a property has 100 units, one unit vacancy means 99% occupancy.

I do not fully agree with this argument. If an owner has four single family homes and one of them is vacant, we can call it 75% occupancy and income from three SFH can pay for the expenses of a vacant home. In addition, if major employers go bankrupt where your investment property is located, its vacancy rate can skyrocket. If you have a 100-unit apartment in such a town, it would result in a major disaster. If you have 100 SFHs in 10 towns, the impact of one town is relatively limited.

A main advantage of multi-unit apartment is economy of scale. You have three roofs if you have three SFHs. The number of roofs can be significantly lower for a multi-unit apartment. Property management and advertisement costs can be also cheaper per unit than SFH.

Major advantages of SFH are residential loans and liquidity of property. Up to four unit properties are considered as residential. You need a commercial loan if properties have more than five units. 30 year fixed rate residential loans are very commonly used. Especially at the time of historically low interest rates, a 30 year fixed loan would give investors a great benefit.

Commercial loans typically have shorter amortization periods, such as 10-25 years. A 30 year fixed rate is rare and usually the loan will be due in 5-10 years. Given that aggressive quantitative easing, inflation is expected and interest rates can be higher than 10% within next 30 years. In this sense, a commercial loan is significantly riskier than a residential loan.

Another advantage of SFH is liquidity. It is a common strategy for first time home buyers to purchase a duplex. They live in one unit and rent out the other. Properties with three or four units are mainly purchased by investors, but are still sometimes purchased by home owners.

Multi-unit family apartments with over five units are marketed mostly among investors. So, liquidity is more limited for multi-unit family apartments.

If you want to purchase 10 SFH at the same time, you may be able to apply for a commercial loan. If you intend to purchase SFH with residential loans, you need to aware of the Fannie Mae guidelines. In February, 2009, Fannie Mae changed its guidelines on residential loans. It used to allow only four residential loans but now it allows up to 10 loans for certain types of investors.

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