Why SFRs are Better than Multitenant Properties (HA 1277)

Transcript:

Steven Butala:
Steve and Jill here.

Jill DeWit:
Good day.

Steven Butala:
Welcome to The House Academy Show, entertaining real estate investment talk. I’m Steven Jack Butala.

Jill DeWit:
And I’m Jill DeWit, broadcasting from sunny Southern California.

Steven Butala:
Today, Jill and I talk about why SFRs are better than multi-tenant properties from an investment standpoint this day and age. Well, the obvious is a lot of people just don’t feel like they need to pay rent right now.

Jill DeWit:
Mm-hmm (affirmative). And you’re going to have more renters in a multi-tenant situation than, I think, an SFR situation.

Steven Butala:
And laws are changing, but we’ll get to it in a second.

Jill DeWit:
We should look at the numbers on that. I’m curious.

Steven Butala:
Before we get into it, though, let’s take a question posted by one of our members on the HouseAcademy.com online community. It’s free.

Jill DeWit:
Jeff wrote, “When you close with title, do you use a full contract like this?”

Steven Butala:
And that’s a 13-page Texas National Association of Realtors or Texas-

Jill DeWit:
Got it.

Steven Butala:
It’s just a big 13-page agreement.

Jill DeWit:
Got it.

Steven Butala:
In California it’s like 40 pages.

Jill DeWit:
“Or do you use a basic …” this is funny, we talked about this too, “or do you use just a basic purchase agreement? What do you send to the title company when you get the deal started?” It’s funny. Thank you, Jeff. That’s a good question. I’ll answer that in just a second.

Jill DeWit:
I just hired a new transaction coordinator who is a former title agent, who is a former broker. And she said, “When I started doing real estate deals in California, it was like a five-page thing, and now we’re at a 45 or more page thing.” It’s kind of funny. I should ask her, “What were the dates on that?” We should even have her on the show sometime, actually.

Steven Butala:
We should.

Jill DeWit:
That would be really funny, ask her some questions about that. I’m sure she has some stories.

Steven Butala:
You know what we should do is have her as a panelist for a webinar and ask all those types of questions about title/deal closing.

Jill DeWit:
Oh, yeah. I could use Jan for that. That’d be really good. So, yes, I’m very happy to have Jan. So to answer your question, the title … Let me back up. I don’t understand why there is this need to have all nine or 13 or however many page purchase agreement when a cocktail napkin with two signatures will suffice. Let me take it a-

Steven Butala:
“I agree to buy your property. You agree to sell it to me for 12,000 bucks.”

Jill DeWit:
Sign it. Date it.

Steven Butala:
And that’s it.

Jill DeWit:
Scan it, “Here you go.” We need to do this, by the way.

Steven Butala:
The question is this … May I?

Jill DeWit:
We need to do that. I need to prove this to somebody, by the way. I’m going to do one on a cocktail napkin and just prove people that’s acceptable.

Steven Butala:
Let’s just take it down a couple notches. Do you need a purchase agreement to open escrow?

Jill DeWit:
Technically, no.

Steven Butala:
No. Most escrow agents will do a … What you need to do is call them and say, “Hey, John, and here’s his number. He’s going to sell me his property for 12 grand. Would you mind doing a purchase agreement?” “Oh, sure. I’m happy to do one. It’s going to cost a couple hundred bucks. We have a template one we use.” So do you need a purchase agreement at all? No. Do you need the stupid one that the state uses? No. Can you use the one that you actually send to people in our mailer? Yeah. That’s what we always do.

Jill DeWit:
The one-page one that you made. Yep.

Steven Butala:
That’s the answer to the question.

Jill DeWit:
That’s really it. That’s totally fine. I was going to take it a step further because everybody thinks that, “This 14-page purchase agreement is going to protect me. Hey, you signed. You change your mind, but you signed.” At the end of the day, it’s going to come down to … Even my one-page purchase agreement. Could I go try to sue somebody over that? It doesn’t matter if it’s a one-page agreement or a 14-page purchase agreement, I can hire an attorney and go after someone and try to sue them. But am I going to do that? No.

Steven Butala:
Are bigger, longer legal contracts better or worse for anything?

Jill DeWit:
Worse.

Steven Butala:
Of course, they’re worse. A tremendous number of people in this planet believe that they’re better.

Jill DeWit:
Mm-hmm (affirmative).

Steven Butala:
They believe that complicated stuff is better, and that they’re more protected, and that’s very, very telling. The vast majority of the people that are in our group believe what we believe, that smaller agreements are easier, less lawyers are better. I can protect myself.

Jill DeWit:
Mm-hmm (affirmative).

Steven Butala:
It’s a sign of the times.

Jill DeWit:
I mean, at the end of the day, my whole point, too, is, Jeff, don’t make work hard for yourself. Be prepared that sometimes things don’t go the way you want. There’s going to be a time in your career, more than once, that someone’s, at the last minute, going to back out of the deal. It’s just going to happen. Are you going to spend your time and energy chasing them and getting mad at them?

Steven Butala:
No. No.

Jill DeWit:
No. You’re just going to walk away. His brother-in-law’s going to decide to buy it the day before your closing, and he’s going to go dark or something. Or he might even be nice to tell you, “My brother-in-law bought it. Sorry. Deal’s off.”

Steven Butala:
Don’t even lose any sleep over it.

Jill DeWit:
Yeah. It’s going to happen. And you know what, and the reverse is true. You might get sick to your stomach and go, “Oh, my God. I missed something in my due diligence.” Maybe the title agent uncover something. You’re like, “I thought there was legal access, and they uncovered there is no legal access,” and you want to back out. And you’re like, “Oh, shucks, I can’t. I’m in this agreement.” You can back out. You could absolutely back out. And you can absolutely say, “Holy cow, dear seller, I didn’t know it doesn’t have legal access. This whole time you and I were talking, you let me believe that there was, or whatever it is. I can’t do it now at this price.” And is he going to come at you? No. We’re 16, 17,000 deals in. The bigger picture is do the right thing. That’s all I have to say about this. Make it easier. Do the right thing. Things are going to happen. It’s okay. Just recover. Move on.

Steven Butala:
It’s the nature of doing what we do.

Jill DeWit:
Exactly. Make it easy.

Steven Butala:
Today’s topic, Why SFRs Are Better Than Multi-Tenant Properties. This is while you’re listening.

Jill DeWit:
Know what I think?

Steven Butala:
Yes. I would love to know.

Jill DeWit:
You want to talk first?

Steven Butala:
Yeah. Go ahead.

Jill DeWit:
Okay. I think that … Let’s just line them up equally. Nevermind that I don’t have the numbers to support this right now, but I strongly feel that there are probably more multi-tenant rentals than there are SFR rentals. Do you agree or disagree?

Steven Butala:
Yeah. I agree with that completely.

Jill DeWit:
Okay. Thank you.

Steven Butala:
There’s a lot of apartments versus houses for rent.

Jill DeWit:
Okay. So having an SFR rental thing, it’s just a different mindset. You got a family in there. It’s different people, but that’s not even where I’m going with that. What’s so funny?

Steven Butala:
It’s so funny, your perspective on this.

Jill DeWit:
Oh, okay.

Steven Butala:
Mine’s all money.

Jill DeWit:
Okay. Well, here’s my-

Steven Butala:
I don’t really care about families.

Jill DeWit:
I know. Yeah. Anyway, and it could be a family in a rental, so those still can be apples and apples. But my main point on this topic is, gosh, if I have a SFR … Or if I have a multi-tenant and say it’s a four or eight units, especially like a four-unit, maybe even a duplex, got one person not paying their rent this month could sink the ship. That’s all it takes. I’m afraid of that.

Steven Butala:
Let’s just say you’re going to send a mailer out, and we’ve recently done mailers for both. You’re going to send a mailer out for houses to buy and mark up 20 to 40,000 bucks-ish or more.

Jill DeWit:
Mm-hmm (affirmative).

Steven Butala:
Or you send a mailer out to multi-center properties like four or five, eight-unit buildings or some number like that. Those two types of properties are valued dramatically differently. The SFR property is based on comparison values around either recently completed sales, properties that are for sale, and there’s a huge emotional component. The people that buy houses to live in, they might like one on one block way better than the one on the next block, and they’re willing to pay more or less for the property. So you have that working for you because you have complete control, by the way, over what you buy. So if you have a little emotional component and you love that the house is cute and stuff, chances are the buyer’s going to see that, too.

Jill DeWit:
I have a little emotional component for you.

Steven Butala:
That’s good to know after all these years.

Jill DeWit:
You knew that.

Steven Butala:
Multi-tenant properties are purely, purely gaged on … There’s no cuteness factor to a multi-tenant property.

Jill DeWit:
I hope I have a cuteness factor.

Steven Butala:
I’ll get to that in a minute.

Jill DeWit:
Okay.

Steven Butala:
Maybe between episodes.

Jill DeWit:
This is me trying to break it up and make it way more fun.

Steven Butala:
Multi-tenant properties are based on capitalization rates or gross rent multiplier, all kinds of statistics. So the only way that a multi-tenant property works, in my mind, is if the rents are below market. In a place like California, they’re dramatically rising constantly. Affordable housing is a big word, right now. So there’s a lot of moving parts and a lot of stuff going on with multi-tenant property.

Steven Butala:
If you’re lucky enough to get one at a good price where the rents are real low, kick everybody out, clean it all up, allow pets or some trick like that, lease it back up and resell it for a capitalization rate that was better than you bought it for, congratulations. You made yourself a hundred to 300,000 bucks. There’s 60 moving parts there versus buying a house that goes like this: You buy a house for 60 to 80% of its value and resell it the next week for retail value because the market’s going up just as much as the multi-tenant property. So if that’s not super clear and concise, I don’t know what is.

Jill DeWit:
It makes a lot of sense. It really does.

Steven Butala:
If you got a strong stomach and you have a really good tool set, multi-tenant properties could work for you.

Jill DeWit:
Yeah.

Steven Butala:
But the chances are you’re not going to buy a multi-tenant property and resell it for more two weeks later.

Jill DeWit:
You know what, that’s what I was going to say.

Steven Butala:
In fact, you’re not going to.

Jill DeWit:
Here’s what I would argue with, too, and this is my last point on this, is if I did the whole multi-tenant plan, I could expect to hold that thing for probably a minimum a year to 18 months.

Steven Butala:
A year. I’d say a year. A minimum of a year. Yeah.

Jill DeWit:
By the time I move people out, do the renovations we talked about. I add a little washer and dryer and everybody loves, now you add the pets. To lease it back up and sell it, if I’m lucky, 18 months. And the amount of financial profit I could have made just happily doing easy SFRs in 18 months is … I would argue I can make more money with a lot less headache.

Steven Butala:
I’m happy you could join us today.

Jill DeWit:
Thank you. Happy you could join us today. You’re silly. Where am I? Every Monday, Wednesday, and Friday, you can find us on The Land Academy Show. Tuesdays and Thursdays, for this last week, we are here on The House Academy Show.

Steven Butala:
Tomorrow, the episode on The House Academy Show is called How to Go from Land Hobby Enthusiast to Business Owner. You are not alone in your real estate ambition.

Jill DeWit:
I’m excited for that one, too.

Steven Butala:
Me, too.

Jill DeWit:
That’s good. That happens a lot.

Steven Butala:
Yeah.

Jill DeWit:
A lot of people spend too much time in the hobby zone, kind of like the friend zone. You don’t want to be in the friend zone. You want to commit or move on.

Steven Butala:
Wow.

Jill DeWit:
Think I’m kidding?

Steven Butala:
No. I don’t think you’re kidding at all. That’s why it’s funny.

Jill DeWit:
No. I just thought of that, by the way. It just came to me. Just like dating, either commit or move on. Thank you.

Steven Butala:
Wow.

Jill DeWit:
The House Academy Show remains commercial-free for you, our loyal listener, so wherever you’re watching or wherever you are listening, please subscribe and rate us there. We are Steve and Jill …

Steven Butala:
We are Steve and Jill. Information …

Jill DeWit:
… and inspiration …

Steven Butala:
… to buy undervalued property.

Jill DeWit:
And dating.