Multi-family can create a good cash flow. But… I believe that in this economy, we need to take into consideration property appreciation. Property values have plummeted to all time lows. The potential for value growth is very high. I believe that the rate of appreciation for SFR is much greater than MF.
So if it was me, I would look at purchasing as many cheap SFR discounted properties (i.e. foreclosures, REO, distressed sales etc). The reason behind this is that a $50 purchase will usually be below market value. By rehabbing the unit, you can see immediate value appreciation plus get the market appreciation that comes down the road.
Additionally, the rental rate per square foot is generally higher for smaller homes. Much depends on your area. If a $200k home and a $50k home is going to rent for 1% of value ($2,000 and $500 respectively), your return is going to be the same and I would go for the $200k investment. But if rents for a $200k home are only $1,800 but you can get $650 for the $50k home, your return will be much higher.
This example will show you why:
Lets assume a conservative annual appreciation rate of 3% over a 5 year holding period. We will set aside 50% of gross income to vacancy and expenses (assuming a cash purchase). Here is the 5 year total:
$21,600 Annual Gross Rent at $1,800 Month
$10,800 Annual NOI
$54,000 5 Years NOI (not including mortgage or income taxes)
$231,900 Market Value after 5 Years Compounding Appreciation
$85,900 Total Profit/Return after 5 Years
x 3 Homes
$257,700 Earned in 5 Years with a $600k investment
43% Total Return on Investment
$ 7,800 Annual Gross Rent
$ 3,900 Annual NOI
$19,500 5 Years NOI (not including mortgage or income taxes)
$58,000 Market Value after 5 Years Compounding Appreciation
$27,500 Total Profit/Return after 5 Years
x 12 Homes
$330,000 Earned in 5 Years with a $600k investment
55% Total Return on Investment
This is assuming that you have $600k cash. If you need to get mortgages on these properties, it is going to be a challenge to finance 12 properties because of lending caps. You will probably need to move the properties into a jumbo loan which carries a higher interest rate. These costs must also be figured into the equation to get a true yield.