Case of multi-family properties versus condominiums as investment

Asked by Mindy, 94306 Mon Jan 9, 2012

Hi -- if a real estate income investor has an option of buying a multiplex versus a bunch of condominiums, which strategy is better and for what reason? I'm sure there's no right/wrong answer here but what are the pro/cons of either approach? Thanks in advance.

Also, specifically from the perspective of holding the property for ~10 years and selling, what would be a more favorable approach?

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John Souerbry, Agent, Fairfield, CA
Mon Jan 9, 2012
I agree with previous answers, but to add:
Investing is about making money, either through appreciation or cashflow. Complexes come with land and condos don't, so complexes are likely to appreciate better.
However, investors in residential property usually focus on cashflow, and I recommend you do too. Condo's do come with HOA fees, and complexes come with common area utility and maintenance fees that the owner usually covers. But apples-to-apples, each individual complex unit will usually be more cashflow positive than an equivalent condo unit, so I always recommend complexes over condos.
Regarding how long to hold - hold as long as your cashflow is good. Most owners I work with hold on to a rental complex until maintenance expenses due to aging begin to dig into profits. For example, if you have a property that will need a new roof in 5 years, you may want to sell it now while it's still looking good and let the next owner bear the expense of the new roof. The same could apply to mass retrofit of aging appliances, aging wiring, aging plumbing, a cracked driveway, a pool that needs resurfacing, or any other major expenses that can be forecast.
Another advantage of complexes is that they can be torn down. Of course this will dig into your cashflow for awhile, but the investment strategy is that you may be able to sell the property for a higher price later based upon the new owner being able to replace your aging 18 unit property with a new and more profitable 24 unit property - if zoning supports it. You may even want to tear down and re-build the property yourself. Owning the land gives you options.
Best of luck with your investments!
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John Souerbry, Agent, Fairfield, CA
Sun Jan 22, 2012
Mindy - there is, indeed, a world of difference between 1 to 4 unit properties and 5+ unit properties. The financing certainly is different, as is insurance, etc. There are also additional government regulations that apply to managing a 5+ unit property.
But I wouldn't say that there are diminishing returns from properties that have more units. The opposite is actually true. The only question is whether or not you have the investor skills to swim in the deep end of the pool. Sometimes it's best to swim where your feet touch the bottom until you gain confidence in your ability to stay afloat.
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Mindy, Home Owner, 94306
Sun Jan 22, 2012
Thanks for all the answers. All answers are great and echo the same preference so verdict is clear! :-)

Just one follow up question: Everyone seems to almost suggest that beyond fourplex it's a law of diminishing returns. Is this correct interpretation or are fourplexes preferred over five-plus-plexes for another reason such as financing (one poster touched upon it needing Commercial financing etc).

Thanks again and hope to get this clarification!
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Dawn Rivera, Agent, Fremont, CA
Fri Jan 13, 2012
Hi Mindy, you got some good advice, and just to put my two cents in....I have to agree with John Dutra. I also think, multi plexes are better because, owning the land is a better investment...Dawn
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Meena Gujral, Agent, Pleasanton, CA
Mon Jan 9, 2012
Hi Mindy,

Condos have come down in price so much that they are also starting to make a lot of sense now as an investment. Condos would be in a lot better condition that apartment buildings. The cash flow may be less than apartment buildings (because of HOA Dues) but they are a lot easier to manage.

Apartment buildings may have more cash flow, but they need a lot of updating and are very difficult to get. I have a lot of investors looking for apartment buildings, but all of them sell with multiple offers way over asking price. The listing price agents have seems to be a gimmic. They usually sell for $50-100K more than that.

Meena Gujral
Help-U-Sell Achievers Realty
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John Arendsen, Agent, Leucadia, CA
Mon Jan 9, 2012
Condo complexes are the last place I'd invest. Single family detached, duplex, triplex or any 1-4 unit residential property that meets our buying criteria. Other than that if you have the financial ware withal I might suggest an apartment complex.

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John Dutra, , Fremont, CA
Mon Jan 9, 2012

I tend to like duplexes,triplexes or four-plexes for investments. Condominiums tend to have HOA fees which vary often, assessments that can come when larger repairs are needed (balconies, roofs, common area improvements, etc.) and rents tend to be lower (much like apartments.

The "Plexes" tend to have some property with them, appeal to renters as being more "home-like", usually rent for a higher amount because of that and often sell easier as well.

The pluses for condos are; little or no maintenance (exterior), amenities (such as pools, tennis/basketball courts, gyms, clubhouses, etc.)

I tend to like the Plexes as an investment - hope this helped.
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Elise Groves, Mortgage Broker Or Lender, Santa Rosa, CA
Mon Jan 9, 2012
Mindy - you definitely should look at this from a financing point of view, as well as location, location, location.

One issue you might need to address is the number of financed properties that this would involve, as there are restrictions. So if you were buying individual condos, then you would possibly have issues with getting appropriate financing.

Another consideration with condos is what kind of shape the HOA is in financially, and are more than 15% of the owners delinquent in their dues, etc. Also, what the owner occupancy ratio is. These will all be scrutinized by a lender.

With up to 4 units, you can still get FannieMae financing, but if you go over that, then you will need to seek out commercial financing.

Lots to consider on the financing side Mindy, so let me know if you need more information and happy investment hunting!
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