Over the weekend I had a call with a family who is interested in buying…
I’ve talked to a lot of people who are interested in real estate investing, but most of them skip the single-family home aspect and move right to the duplex, triplex, or quad investing. Perhaps this is because they have learnt that these properties create more cash flow. It is true that duplexes, quads and triplexes do produce more cash flow on paper, but in reality these numbers can be misleading.
Lower Rental Rates
The rental rates for duplexes compared to single family homes are lower, especially when you get into quads or triplexes. For example, in Memphis, where I invest, a single-family home rents out for $700 to $750. If that were to be a duplex, each unit of that same property would rent out for $500 or $550. But you’re going to have to pay a little bit more for the duplex than for the single-family home. So when you’re calculating your numbers for your duplexes, triplexes, or quads, be aware that you’re actually finding comparable rental rates for the same size of building. Don’t use comps for a single-family home if you’re buying a duplex, etc.
Normally, the tenant quality is lower when you move into multi-families compared to the single-family homes. In single-family homes we are more likely to rent out to families of three or four. It might be a mother, a father, and a child; or a mother and her two children; or a mother, father, and their two children. Those are the types of people that are moving into our properties when we have single-family homes. On the flip side, duplexes or other multi families normally have a greater pool of tenants. Sure you’re going to get some families, but you’re also going to get a college kid and his other buddy, or a newlywed couple, or a couple that’s dating. Most of the time these tenants are also much younger than the ones who are renting out the single families, so the tenant quality decreases.
The average for a tenant to live in our single-family homes is around 18 months. But if you compare that with a duplex, for example, the average length that the tenant will be in there is nine months. Which is significantly less. These people tend to not stay their full leases. They’re paying a lower rate, they’re not that good of tenants in terms of quality, and they’re also not staying their full leases. It is therefore very unlikely for a tenant in a duplex or a quad to stay for four or five years. But in a single-family home, this is much more likely, especially if it’s a family whose kids are going to school nearby and the parents are working somewhere close. For them to pick up and leave is pretty difficult, compared to a college kid, or two roommates going to Community College, or a newlywed a couple. There are a lot more things that can arise that would make those tenants cease renting your property.
Higher Operating Expenses
With single-family homes we can pass all the operating expenses on to the tenants. For example, the tenants handle the lawn care, the water, the electricity, etc. But if you look at a quad, for example, the owner actually has to pay for the lawn care and the property upkeep, because there are common spaces of the home that just can’t be split up. For example, in some quads or other multi-families, instead of having four water meters, there is just one, which makes it difficult to split up the water bill. There are ways to split it up, but sometimes the landlord has to just eat the water bill cost for their tenants.
In the end, these multi-families are good investments. But it’s good to make sure that you’re putting in quality tenants and double-check what the rental rates are for those types of properties.
If you’re buying a duplex, find rental rates and comparable rents for duplexes. If you have a quad, find rental comps for quads, etc. You want to make sure you sign these people up with 12-month leases, at the very least. Don’t do month-to-month leases because you want your tenant to stay in there as long as possible. Make sure that you have the right number for operating expenses and that you can pass on a lot of those operating expenses onto the tenant. Check if there are separate meters for water and other utilities so that you can split up the bills and pass them on to the tenants.
If you have any more questions or concerns about this reach out to me. I will be happy to help you run the numbers on it.