fbpx

What Rental Property Should You Buy

Written by Connor Swalm

 

Jaime: Hi everyone and welcome! My name is Jaime Swalm and I am here with Connor Swalm and together we are the hosts of The Landlord Resource, brought to you by Swalm Property Management. Where each week we provide practical content to educate and empower landlords. Connor, how are you doing today?

Connor: I’m doing wonderful today.

Jaime: Alright, so we are good to go. So Connor and I are investors ourselves and actually Connor did his first solo flip when he was 19. It’s kind of a fun experience, it gave him Power of Attorney over the settlement and purchasing the house and when he walked into the settlement, the sellers asked him if he was old enough to be there and he kind of pulled out his Power of Attorney and he found the property, he negotiated the property, he did the scope of work. He actually did everything. In fact, I didn’t set foot in the property until 6 weeks after it was already under rehab. Anyway, so Connor’s been investing a while and we actually coach real estate investors and in particular, we educate individuals we work with at Swalm Property Management to help them as investors to build their wealth as wealth partners. In fact, just 2 weeks ago, we just closed on a transaction where we helped our latest investor actually find and identify property. And part of that process was working with that couple to determine what is it they wanted to purchase. It is gonna be their first investment property. Where they want it, what kind of property did they want, how many doors did they want, did they want it to be single family, did they want it to be multi family. So we thought that we would give you a little bit of a snapshot about how this process works with us, when an investor works with us to find a property. And so today we’re gonna talk about…is it single family or is it multi family and as a landlord or a potential landlord, how do you know which one to buy? Alright, that sound good?

Connor: Sounds great!

Jaime: Alright, so let’s get started. So first thing we’re gonna talk about is out of pocket costs. So what any potential investor or potential landlord wants to know is that when I purchase a property and it’s an investment property, how much am I going to have to pay, take out of my pocket to actually purchase this property. So what do you think?

Connor: There are a couple of things to think about when trying to figure out the exact cost that will go out of your pocket when buying a property. But in general, when you have to compare a single family rental versus a small multi-unit, we’re talking about 4 units and below, it is less expensive, less money out of your pocket to buy a single family rental and there are a couple of reasons why. One, the first and pretty much the most obvious is it’s generally a smaller home. So between a single-family rental or a 4 unit, for multi-unit it is gonna be a smaller house so there is a smaller down payment involved, generically with commercial and conventional mortgages, you can do a lot of different things so that is a huge factor but a smaller property smaller price will always generally lead to a smaller down payment. Second is with a single-family rental there’s less maintenance, so if you have more units there are more tenants and when you have more tenants, you will have a lot more maintenance. So there’s gonna be a lot more maintenance going on sometimes that require pre-paying,  that requires more wear and tear on your property so you’ll be putting more out just in maintenance cost, just because there are more people there to make the maintenance necessary. The third reason that single-family rentals are generally less expensive is that insurance is less expensive. So on your homeowner’s policy it’s less expensive to insure one living unit. If you had a 4 unit, four plex, and you had a single-family rental, you’re not insuring 4 living spaces, you’re insuring just one living space. So generically, your insurance is gonna be a lot less cheaper, it’s going to be a lot easier to deal with as well because insuring a single-family rental is much easier process than insuring a unit that someone or 4 different families or 4 different people will be living in. And also one more thing to think about, that a lot of owners sometimes skip over because it’s a kind of ancillary cost is the transfer of utilities. So in a single-family rental there is only one possible tenant that can use the utilities of a single-family rental and it is the tenant that is living there. However in a multi-unit complex, specifically if your units are not separately metered, you cannot transfer utility costs. That’s how it works in Delaware. At least so if you do not have separate meters for every unit, you cannot charge a tenant a percentage of utilities just because you can’t say who used the utilities and sometimes if an owner doesn’t quite understand that, before they buy a property it could be a pretty significant cost. So especially if not just your water is separately metered. It could be a pretty expensive monthly cost or quarterly cost whenever it’s billed if you don’t take that into account and also once, at least in the city of Wilmington, once you have bought a unit that, let’s say is not separately metered, it is a very hard process, so then go get that metered, separately metered. You got to get the city out, you have to get the county out to do a lot of inspections, to change the status of the unit and I don’t know exactly what, I’ve never actually gone through the process but I’ve heard about that and I heard that it is very difficult both on the owner’s side and both on the landlord’s side. So if  you have a landlord and you ask your landlord to go get that separately metered is a very difficult process. So those are a lot of things to keep an account and pretty much all of those speak to a single-family rental being less expensive and general less money out of your pocket.

Jaime: Yeah that’s good and just a quick tip, as you know Swalm Property Management is in Delaware and so one of the things about Delaware is it’s called an attorney state. Which means a closing attorney must do the settlements for real estate. So your settlement attorney, for those of you who are landlords, or if you’re thinking about becoming a landlord for the first time. Your settlement attorney will prepare something for settlement called the closing disclosure and that closing disclosure will list all of the costs to that transaction and so that is the quickest way to get an estimate of how much out-of-pocket costs you’re actually going to have to pay and in fact, we, just the other day closed on one of Connor’s friends. We helped buy his first house and the settlement attorney that we were using from one of my offices actually had estimated the cost, out-of-pocket costs and when we’re actually at the closing table he ended up being only $54 off which I thought was pretty extraordinary. Alright so that’s out-of-pocket costs. Now the second thing we want to talk about his long-term returns. So why did you do you own real estate? Why are you thinking about owning a real estate? There really is only one primary reason and that is you’re looking for a long term investment. That is going to gain your wealth long-term. So let’s talk about the long-term differences between single family and multi-family.

Connor: So long term, both sets whether or not you buy multi-unit or single-family rental, both have good returns when they’re done right. So pretty much they can be held equal in the long-term, keeping that you do everything correctly at both sides. However, there are some differences in the type of cash flow or the type of returns you’re gonna get between single family and multi-family. For instance, multi-family will have a lot of more cash flow. There’s just gonna be generically more units so there’s gonna be more rents coming in and you’re still gonna be paying a single mortgage, and therefore you’re gonna have a lot more monthly cash flow coming in. So as we talked about in the previous section, for out-of-pocket costs you’ll pay more upfront but you also get more cash flow because there will be more people running there. Also one thing to keep into account, also sometimes owners skip over this, if your single-family rental is vacant, that unit has 100% vacancy rate. However if you have a 4 unit, multi-family property and only one unit is vacant, you’ll have a 25% vacancy rate. So vacancy is not as big of an issue the more units you get. Now vacancy for that single unit might be the exact same as a single-family vacancy but your overall vacancy is much less in multi-family. So your overall cash flow stays higher and your re-tenanting fees and however you are, property manager or landlord or however you decide to be compensated for tenanting a property or turning over the lease or doing property turnover, is less expensive because you have less vacancy generically. Another thing is be careful, as we’ve talked about, if multi-family units are not separately metered. You really, in Delaware at least, you really cannot transfer that cost if it’s not separately metered. And we’ve seen tenants do some weird things, especially if you’re providing them with washer and dryer, where it seems like the entire city block’s wash is getting done in your property, on your water because they have free water, and washer and dryer to do that with. So we’ve actually seen that in some properties. So that’s something to be careful of, if something turns being free, it will just get used more and more and more and that will become a much greater cost. Another thing to keep in the long term, is if you’re if you’re buying real estate for the appreciation. Single-family rentals will generically have more appreciation and that is because a single-family rental has much more demand,right? So an investor wants to buy a single-family rental, first time home buyer, second time home buyer and also leased to owners to renters that would like to own a house that leased will all want a single family home. However the only type of person that is gonna want a multi-family is an investor. No one wants to buy a multi-family to live in it themselves unless they’re trying to rent out  the other units as well. So an investor is going to be the only type of person that is going to buy a multi-family unit, so there’s less demand. So really, also multi families are generically valued based upon the quality of the property and the amount of rent they bring in. Whereas a single-family rental is valued by demand so appreciation is gonna be higher because demand is going to go up at a certain area. Maybe you have more job routes or maybe there’s just less housing but there is more demand for single-family rentals and so your appreciation this going to be much higher.

Jaime: You know that’s true. So here at the Landlords Resource we educate and empower landlords and one of the most common questions that we get or one of the most common apprehensions of brand new landlords or folks like yourself thinking of becoming a landlord is how difficult is it going to be to maintain my property and as part of that is manage my property. Nobody wants to get an investment property and become a landlord and walk into a difficult or a nightmare situation. Every potential landlord wants to have a positive situation and there are many landlords, that the only reason they exit landlording is because it becomes very challenging and the challenge of it overwhelms the reason that they originally got into landlording. And so let’s talk a little bit about what is the difficulty in maintaining a single-family versus a multi-family.

Connor: So difficulty to maintain, when trying to factor in what type of property you should buy, really only comes into play when you’re planning on managing the rental unit yourself. So if you’re hiring a property manager, you’re not going to have to deal with it, whether it’s a single single family rental, whether it’s multifamily, if you have a property manager that you work with, you’re not going to have to deal with the issues at three in the morning when a tenant calls you because the water’s leaking, your property manager is going handle that. However, this comes into play if you are trying to manage it yourself. So things to think about, if you’re trying to manage it yourself, a multifamily unit will have more rent, but you have more tenants and more tenants will be, as I said earlier, more tenants is a lot more maintenance so you’re going to be dealing with a lot more maintenance and you’re going to be dealing with a lot more tenants because actually communicating with tenants on a regular basis is a very time consuming task. A lot of what we do here at Swalm Property Management is communicate effectively with our tenants very often. So we want to touch every tenant, whether it’s email or phone call or in person, inspection or may have one of our maintenance guys go talk with them to do maintenance thing every week. We want to have a communication with a tenant. If we don’t hear from a tenant in a while, that kind of gives us a little pause. Like especially if it’s a property that might need more maintenance than a brand new property. So you’re going to be doing a lot more communication. You’re going to be in a lot more maintenance and you’ll all have one thing to think about, if you don’t hire a property manager, you’re going to have to do the showings yourself. I always state that if a property management company does one thing well and that one thing is put a tenant in a property, whether it’s the best tenant and they put the best tenant in there quickly. If the property manager does that very well, that’s a great property manager. You make all of your money when you tenant the property correctly. Now if you’re managing this property by yourself, you might not have access to the professional property management software so you might not be able to screen the tenant as effectively and keep in mind, you’ll have to be doing all of the shows yourself. Now you can hire property management company and we actually do it for a couple of people where they’ll just tend to the property and then when the tenant is put in the property and the security deposit is then disposed to yourself and you just pay the landlord to tenant the property, and then you take over management. People do offer that, we offer that. Honestly, I think it’s one of our best services because the hardest thing to do is tend to property correctly. If you’re not going to do that, you’re going to have to show the properties yourself that can require, if you, especially if you have a full time job, like many investors do, you’re going to have to negotiate or navigate around your schedule, around prospect of tenants schedule. Sometimes it won’t match up. It’s just generically a large headache, especially the more units you add on. But if you’re not going to have a property manager show it, you’re just going to get more and more and more headache. So that’s also something to think about when trying to figure out how difficult it’s going to be to maintain the property you’re going to buy.

Jaime: Yeah, I think that’s good in general, you know, it’s the finding the tenants. It’s dealing with difficult tenants and it’s managing maintenance, especially getting those maintenance calls at 1:00 AM in the morning and often they’re very emergent dealing with water. Those are really the three big things and so clearly to get a great tenant in the first place to be able to work with that tenant so they keep up your property is great. And then to be able to not have maintenance headaches is great, but it’s a very important area to think about because nobody wants to get into a situation where their investment property is a headache. So we have a couple of things we want to talk about that we kind of put in a section we’re going to call intangibles and these are things that are important for you to consider and we’re kind of lumping them together.

Connor: So intangibles. We just want to touch on things like the quality of renter, the person, the tax implications and generically just the quality of a home you’re going to get and how easy or how difficult it will be to deal with the property.The first for tax implications, for appreciation and depreciation.10-31 exchanges for multifamily and single family, especially if you’re below that five unit cap, they’re going to be about the same. So long term tax implications there isn’t really a huge difference. The biggest thing in my mind that I see between a single family rental, especially your larger single family rentals where you’re going to have a whole family move in versus a multi unit is you’re going to get a high quality renter. So every tenant that we have placed in a single family rental that is more private, it’s a little larger. Whole family moves in. It’s generically a higher quality tenant. They’re gonna treat the property a little better because they feel like it’s more their home. Sometimes they handle problems themselves. They don’t give us a call. They usually pay rent more on time because they’re more organized in my mind, just a little more organized if it’s a whole family moving in there, so you’re going to generically have a better tenant in a single family rental, which leads to a lot of, a much better financial situation in some cases. Another thing to think about, single family rental has less turnover. So I touched on the family unit moving into a single family rental. Maybe that’s a contributor as to why single family rentals have less turnover. I’m not exactly sure. Maybe it’s that higher rents are a bigger commitment and so if someone commits to a higher rent at a single family rental, they’re going to stay there much longer because it’s much harder to move out. It’s much harder to move when you have more things to move. Maybe that’s the reason why, one thing to think about is it’s easier to exit a single family rental. And then we talk about that by exit, I mean liquidate the assets. So if you are an owner of a single family rental, you can go through conventional routes like selling to a realtor, to another home buyer once you buy out or once that lease ends, you can also sell to lease to owners I had talked about earlier and you can sell to investors. It’s generically much easier to exit a single family rental to liquidate that asset that it is multifamily. And that goes back to a little bit of demand and a little bit of the prices and the types of organizations you’re dealing with in a multifamily versus a single family rental. It’s usually easier to exit much easier and exit both, as I talked on tax implications earlier, both have 10-31 exchange status if you know what that is, where you can just chain flip ’em for a lot of tax benefits properties into one another. Both will have that status more most often. And we touched on earlier that a single family rental valuation is based on supply and demand, where a multifamily evaluation is based upon the overall condition of the rental, including the rents. This means that multifamily has much more control over its price and that’s why there’s more appreciation and as a result, also possibility of more depreciation than a single family rental.A multifamily, if you keep the rents steady, if you keep the property well maintained, the value of that property is going to stay more equal, up, more close to the same. There’s not going to be a lot of deviation. It’s going to be a pretty consistent, a stable asset.

Jaime: Yesterday actually Connor and I went and we looked at a single family investment property and you actually put an offer on that property today, matter of fact. But in our own process, just to kind of illustrate that, we went and we looked at the neighborhood, we looked at the home, we looked at what kind of, in this case, single family, what kind of family would live in this home, in this neighborhood, at this rent price point. And asking those questions is very important to us because we can envision down the road homes all fixed up,but what is the quality of the tenant that is going to live in that house, in that community? And that’s a game changer for us. Because if I had to say one thing, I know we’ve said it a couple times here, at the end of the day, the quality of the tenant can mean everything in a rental property.So I am a potential landlord. I’m listening to this. I’m not a landlord yet. I want to be a landlord. I’m going to dip my toe in and buy my first investment property. Given everything we said, what should I buy?

Connor: First, I would always consult a professional whether or not that means working with property managers like ourselves, what will happen, we’ll help you buy the property or whether or not it’s working with a real estate agent because you’d like to manage it yourself. Maybe you work with the real estate attorney, maybe work with a mortgage company, whoever it is, whoever you have a really good trusting relationship with, always consult a professional. They’ll be able to help you out. And really what should you buy comes down to what financial situation you are in and what kind of situation you would like to move into. So if you have more money to spend or less time, maybe you’re going to opt for a multifamily unit. Maybe you’re gonna move up above that four unit commercial cap. I mean you’ll go into five or buy a much, much larger property. Whereas maybe if you don’t have that amount of capital to spend, you just want to start with a small single family rental. Dip your toe in the water, figure out what it’s like to manage a property. It really just depends upon your situation. What you want to do, take into account the difficulty to maintain that we talked about earlier. It really is a difficult job to communicate with tenants and to be a property manager in general.So sometimes it’d be very hard to start with four or five units if you’ve never done it before. So I will take that into account. And also keep in mind when buying these properties, what kind of return you want. Maybe you need the cash flow to live on. Maybe you need the cash flow from a multi unit to support the lifestyle you want to live. Or maybe you’re young, you don’t need the cash flow, but you’d like the long term wealth because you want to retire before you’re 50, maybe you want to retire when you’re 45. Maybe the best thing to do then is to just keep buying single family rentals because like I said, appreciation is much bigger in single family rentals and you also get more stable, more productive renters generically than in a multifamily. Whereas in a multifamily you’ll get more rent so you’ll have much more monthly cash flow to deal with.But you also have more headaches if you’d like to do it yourself. Take all those things into account. Remember, always consult a professional, always ask questions. Don’t be afraid to speak out. If you’d like to reach out to us personally to ask some questions, we can give you advice from a Delawarean perspective because that’s where we operate. I’ve been an investor for over five years now and we’ve helped a lot of investors buy homes. We’ve helped a lot of people buy homes that aren’t investors. So we could give you some advice if you’re looking for some or we could point you in the right direction. Show you who to ask.

Jaime: Yeah, absolutely. Don’t hesitate to reach out to us directly if you have any questions, what’s the easiest way for them to do that?

Connor: If you’d like to reach out, just a email me personally,connor@swalmrealty.com. Or just fill out a contact form on our website and one of our real estate professionals will get in contact with you.

Jaime: Alright, well I’m so glad that you’re able to join us today. We look forward to seeing you on our next show.