In your opinion, which portfolio strategy is better and why: Owning several three unit homes, or, owning a single larger unit building (like a 15 unit building)?

I'd like to hear investor arguments. I have some clients that swear by only buying no larger than 3 unit buildings with the reasoning that if the market slumps there are more potential buyers out there (owner-occupants) for the 2-3 unit buildings than for the 6 or 15 unit buildings. Others don't dabble and only purchase ones that are 6+ units so that they can capitalize on economies of scale.

Which way is the way to go, small scale multifamily, or larger scale apartment buildings?

Would like to hear your thoughts.

well if you can aquire the financing for a larger building i would look into that. Based on where i am located one 12 unit property taxes may be around 10k a year. Owning four 3 unit properties at a yearly tax of 6000 per unit shows value right there. Why pay 24000 in taxes when you can pay 10 and save 14k a year in taxes.
If you hold 4 mortgage on 4 properties thats 4 different banks you are paying mortgages on. Paying 4 mortgages at 6% interest is more expensive than paying 1 mortgage that is larger at a higher rate if needed.
If you own a property and sell it for the same as you paid for it. But your cash flow was two times the amount it would be on owning several smaller properties that is something to consider. Anyone who would or would not buy property based on future value ( other than a rehab) must have some insight because no one knows where the future is going. Values may double they may cut in half. I prefer to look for my clients to get into properties that are creating cash flow now. Very rarely do I put them in a property that is taking a loss. Only when there is a property that with some rehabbing and in the hosrt term they can sell the house for a larger profit or increase cash flow with raising the rents.

Eggs in a Basket

Investment requires a certain amount of diversity or your adding in more Gambling vs Investing.

Also every market has its own characteristics... in my area 16 unit properties are as rare as... well we don't have any that I know of... Other areas may have an abundance. The difference will often be reflected Exit Plan in the form of Anticipated Days on Market and marketing cost.

What you have in the way of investment properties should be driven by your business plan which should always include an Exit strategy. Always consider the 3 points of profit... buying below market, cash-flow and ROI return on Investment at sale... even if your not planning on a sale anytime soon.

In my market the multiple properties vs a large single one would generally be a better business decision because I could make sale or hold decisions based on individual properties as the market changes. Far harder to do with something that has a much smaller circle of potential buyers.

Unless I have at least a group of individual properties valued at a minimum of 300% of what my largest potential acquisition was for a Hold property... I would pass in-favor of more of the smaller units... but you have to run you numbers based on what your goals are and what your area market is... but never forget planning for exit.... never buy an investment property without an exit plan.... and keep it updated and under review even if it is a Cash Cow.

Thanks so much for your insightful replies, MortgageRX & Realty Check. I really appreciate you both taking the time to respond.

MortgageRX,

You make a great point about the taxes...in your argument I guess one would have to teeter the slippery slope of buying a building that's assessed lower (hence, usually older/lower grade) to that of one that's assessed at a higher amount. Point well taken. Thanks!

Realty Check,

Great advice. I guess each investor has to work with what he/she's got in their respective area...which offers me a perfect segway into another question, how do you define "area"? Is it within 20 minutes of where you live, your state, Northeast, or entire east coast? For example, you mentioned that the larger apt buildings are pretty rare in your parts...hypothetically speaking, what would hold you back if you were actively involved with large scale multifamily from going outside of immediate vicinity to purchase a building? I've yet to even to develop the courage to look outside my area. Proximity gives me comfort, I guess. My good friend from high school, on the other hand, is buying left and right in Texas, Arizona, etc. No fear.

I've entertained the idea of purchasing a larger unit building (via 1031 exchange), but I also had the same type of formula in my head of 300% (or, owning several buildings free and clear each with their own respective emergency funds) because I know I would worry myself into some type of cancer if I had to depend on that one building. I've decided to wait, for now, especially with the appreciation rates of smaller scale multifam currently in my area (approx 33% per year). Some of the 3 family homes in West Hartford, for example, are selling for 350K, at the same time that a 32 unit just sold for a meager (realtively speaking) 600K. Thank goodness for the emotional multifam homebuyer. :-) At this rate, I'll be able to sell and pay with cash...or, perhaps this pig is going to get slaughtered (like in my previous life as a tech stock dabbler :-)).