This or That
Humans are naturally inclined to squeeze everything into simple, categorical dichotomies. We want everything to be "Good/Bad" or "Correct/Incorrect" which is understandable. If we're able to fit everything into these black and white categories it makes life and decision making much easier. Unfortunately, the reality is that it's hardly ever that straightforward. An individual's situation can greatly affect whether or not something is good/bad or right/wrong. Context is a huge factor in determining how to judge anything and this is especially true in the case of real estate investing. In the RE world you will frequently hear new investors asking whether one asset class is better than the other or if some piece of advice they were given by a friend is right or wrong. We've all heard some guru talk about how multi family apartments are the superior asset class or how land investing is the only way to really become wealthy. The truth is, whether or not any of the assertions are accurate depends on the context and the individual's goals. What might be the best class of investment for one person may very well be the worst option for the next, it's never a simple dichotomy. Let's look at a few common examples in the world of real estate investing.
One of the first real estate podcasts I ever listened to focused on apartment investing. The host and all of his guests were constantly proselytizing about multi family as if it were superior to all other forms of RE investing. They spoke endlessly about the advantages of scale and how much quicker they were able to build their wealth and achieve financial independence through apartment investing. Fast forward several years and I was at an investment group here in Colorado. The guest speaker had been in business for over 3 decades and owned hundreds of single family houses around the southwest. Several times throughout his presentation he stated that single family houses were the best investment vehicle available, period. The host of the podcast I referenced and the speaker at the local RE group were both extremely successful in their businesses. They've both managed to build enormous amounts of wealth and create lives where they can work when/where they want. So who is right? The reality is that neither one is correct. Whether or not somebody should invest in multi or single family is entirely dependent on their goals/context (more on this later). It's not a simple dichotomy.
Another classic example that I see consistently is "Is now a good time to buy?." Novice investors ask this question in reference to the current state of the market with the expectation of a unquestionable "yes" or "no" answer when again the reality is that it's not that simple (unless of course you happen across one of those clairvoyant types who always knows exactly where we are in a market cycle). The answer to this question is entirely dependent on your financial situation, goals and the specific asset that you want to invest in. When someone makes a generalized, black and white statement that now is/isn't a good time to buy, you should be wary of their intentions.
There's an age old argument among investors about whether you should invest for cash flow or appreciation. Some people swear by purchasing cheap properties in lower middle class neighborhoods where the rent relative to value is extremely high. Others claim that buying in expensive cities and banking on appreciation/amortization is the best strategy for investing. Again, both camps claim that their strategy is the best, they act as if it's a simple question with a clear answer as to which option is better. This is completely ridiculous, just like the other examples the right answer varies dramatically depending on someone's situation and goals. Are you looking to quit your job as soon as possible and live off the income from your properties? Then cash flow is likely the most important metric for you. Do you have a high paying job that you enjoy and you're looking to utilize real estate as an avenue for diversification come retirement? Then perhaps more expensive B/A class properties may be the sensible option. In reality, a mix of the two strategies is most likely the best route for the average investor. I could go on forever with examples, but I think 3 of the most common ones should amply get the point across. It's not a simple dichotomy, it always depends on a variety of factors.
It's how you frame it
"Multi family is better than single family because your risk is hedged. If you own a fourplex and you lose a tenant you've only lost 25% of your income whereas with single family if you lose a tenant you've lost 100% of your income. Clearly, multi family is a safer, more predictable asset class to invest in."
"Investing in single family homes is a much better option than investing in multi family apartments because you're taking less risk. If you own a fourplex you're four times more likely to end up with a problematic tenant who doesn't pay rent and damages your property. With a single family house you just have the one tenant that you can screen thoroughly and the risk of ending the relationship with an eviction is much lower. Single family investing is undeniably the better way to go."
See how that works?? Any positive can quickly be turned into a negative. Whether or not something is good/bad or right/wrong is entirely dependent on how you frame it, it's never black and white. Let's look at another common example that pertains to our aforementioned discussion on whether it's a good time to buy.
(In a bull market) "The market is too hot to find deals right now, everything is overpriced and it would be much easier if it were 2008 and cheap real estate was available everywhere. This is not the right time to buy." (Or) "The market is extremely hot right now, capital is the cheapest it's ever been and available in quantities never seen before. It's extremely easy to fund deals and find buyers immediately. It's a great time to buy!"
It's all a matter of perspective.
They're probably trying to sell you something
In our earlier discussion on single family vs multi family, I referenced two well-known real estate investors who had virtually nothing in common when it came to their approach in business. However, there was one thing that they had in common...... they were trying to sell something. When you run into someone who does speak as if these common questions have a simple, black and white answers, be wary of their intentions. Investors who've been in the business for years and have had success know that there are many ways to build wealth through real estate investing. They rarely make definitive statements about one asset class or strategy being best, unless they're trying to sell you on their course/coaching/books/etc. At the end of the day, anyone who speaks in absolutes is either clueless or trying to sell you something (irony intended).
Beyond real estate
This discussion goes far beyond real estate and extends into nearly everything. Within the larger world of investing you'll hear people debate whether equities are better than real estate, whether managed funds are better than passive, whether hard assets are the way to go, ad infinitum. Again, it's never that simple! Do you have an excess of time or do you need purely passive investments? Do you enjoy your job and intend to work until retirement age or are you looking to create financial independence much sooner? These, among other considerations, all play a role in determining what the right answer is and even so it's likely a mixture of different strategies, it's rarely black and white.
Even beyond the investment world, are most issues really dichotomous? Is there a clear cut best political position? Would we suddenly be living in a utopia if we had a purely laissez-faire economic system? Is being conservative in all circumstances (or liberal) the obvious choice? Many people sure think so. But I'm not so sure, trying to squeeze everything into a simple dichotomy is difficult and just when you think you've found a case where it's appropriate you're likely to find a situation where your assertion is inaccurate. Talk to any doctor who is regularly treating a large volume of patients and you'll find that even in the context of medicine there is difficulty assigning basic, bilateral rules.
To conclude, let's bring this conversation full circle by returning to our initial discussion on real estate. "Real estate investing" encompasses a wide range of asset classes and a multitude of strategies for squeezing maximum returns out of them. There is no one best strategy or approach, few things are inherently right or wrong. Everyone has different goals, abilities, risk tolerances, etc so what it best for one individual may not be for the next. So if you're wondering whether you should invest in single family or multi, if investing out of state makes more sense than locally or any of the other common questions in the real estate investing world, avoid the gurus who give definitive answers in their attempts to sell you their exorbitant coaching program. Realize that there are many paths to your goal, analyze your unique situation and pursue a strategy that fits!
This blog was written by Dan Haberkost: firstname.lastname@example.org, 330-410-4952