Do you manage multifamily properties? This is a question we field at least weekly. San Antonio’s real estate is hot and the rental market isn’t much different. Investors from all over the country are looking to invest in San Antonio’s rental market. The majority of the investors we talk to are new to real estate investing and read as much as they can on the subject—which is great—but, the downside is mileage varies tremendously with that information.
A good example of that information is that multifamily properties, like 4-plexes, are favored by many “experts” because of the cash flow potential. It looks even better to cash flow on four units than just one, right? The spreadsheets many find online and use to plan their multifamily investment property journey don’t take into account one important factor: reality. Sure, you can put that of the four units, you’re going to see a 10% vacancy rate, but what does it mean realistically? Does the spreadsheet take into account the likelihood that tenants in one unit skipped out two months early (lost rent) and another let their child draw all over the walls (increased damages)?
In our experience, the reality is that 4-plexes aren’t worth the money or the trouble. In college towns or more urban areas, your experience may be different. Here in San Antonio, we don’t see the benefit. Let’s take a look at the issues we’ve seen here at Pyramis to help you better understand our perspective.
Rents & Deposits
Starting with what should be obvious, rent. Can you charge the same rent for a 950 square foot 2 bedroom unit in a 4-plex as an identically-sized apartment unit? You can try, but the odds are you’re not going to get it. Why not? For the most part, it’s all about the amenities (we’ll get to that in a moment). What about deposits? Apartments have enough volume to offer lower deposits and “$1 move-in” type specials. If you reduce your deposits to compete with apartments, you’re increasing your risk when it comes to damages when the tenant vacates (more on that later too).
Let’s face it, renting a unit of a 4-plex isn’t that much different than renting an apartment unit. Likely no yard, minimal patio, shared walls, common parking, etc. Apartments have a major advantage over these type of units, they offer amenities. Clubhouse, gym, walking trails, gated access, and let’s not forget the pool.
Our experience shows that tenants in single-family homes stay in the property far longer than those in duplex or 4-plex units. More turnover means more vacancy and more wear & tear on the unit. From a landlord’s perspective, tenant turn is the most expensive part of owning a rental property. Vacancy means there’s no rent coming in. More wear & tear means more expensive repairs that come from the owner’s pocket. With increased tenant turnover, versus a traditional house, it’s less financially feasible to own these.
Most of these tenants we encountered in these types of units leave the property with more damages than tenants in our houses. This means, you’re going to use more of their deposit in order to restore the unit back to a rentable condition. Often times, their deposit doesn’t cover the damages and the repairs take longer than a typical tenant turn, which leaves you with a longer period positive cash flow.
Do you see the cycle? Harder to find qualified tenants, they don’t stay as long, they leave with more damages, property is vacant longer. It just continues from there and seems like a waste of time and money. Again, your mileage may vary.