#31: Single Family Investing at Scale ft. Elaine Stageberg

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Welcome to the Passive Income MD Podcast where we talk about creating your ideal life through multiple streams of income. I'm your host Peter Kim. If you enjoy hearing about this stuff, make sure to hit subscribe so I can bring it to you every week. Now let's get on with the show. Doctor Elaine Stageberg has a background as a psychiatrist and healthcare administrator, but she's also the owner of Black Swan Real Estate. She developed a passion for real estate upon renting out her single family home after the 2008 crash. Now learning that she truly enjoyed working with residents and providing high quality housing and a service beyond it, she partnered with her husband Nick to purchase and rehab their first investment property in Oklahoma City in 2014. Since then, as the co owner and principal of Black Swan Real Estate, she has helped so many investors with limited time or desire to actively invest in real estate actually do that. Since then, she's also secured seven figures of investment dollars with 100% return on capital and interest. Now she's going to share some tips and strategies based on her years of experience and I know you're going to enjoy it. Thanks so much for being part of this. Elaine. Take Take it away.

Hello and welcome. We are going to be discussing single family investing at Scale. I want to thank you. I am absolutely committed to making this an excellent use of your precious time. Today we're going to be talking about single family investing because it's a topic that's very near and dear to my heart. I'm very passionate about sharing about it because it has allowed me to achieve financial freedom through investing in real estate even before I completed residency through my companies, Black Swan Real Estate and Black Swan Living Property Management. I personally own a portfolio of about $10 million, principally in single family homes, and I manage a total of about $20 million of single family home assets for myself and for other investors. Everything I'm going to share comes directly from my lived experience as a very active real estate investor over about the past 10 years and as the owner of a property management company over the last several years. I strongly believe in the power of investing in single family homes. In fact, the number one question I get when someone wants to learn about my real estate success or perhaps engage my team for purchasing an investment property of their own is why do you invest in single family homes? The advice that they hear from things like Biggerpockets and other podcasts is to invest in small multifamily. We think that the trend to invest in small multifamily can be good advice but we also think there's a lot of dynamics that people should be aware of. And it's our opinion that single family homes are the best opportunities for most investors and most markets. And today I want to take some time to share some of those reasons with you and to explain how you can be successful investing in single family real estate at scale. So with all things, I like to start with the end in mind, and that includes this presentation. We're going to cover a number of topics here. We're going to discuss the 1% rule and how that's so applicable. We're going to talk about tenants and how they really are the prize in real estate investment. We're going to talk about the numerous entrances and exits to the single family and multifamily markets. We're going to think about the long term outcomes of holding either of these assets. We're going to have a frank discussion about how far away you are from financial freedom and how that impacts what asset class you choose to invest in. We're going to talk about a potential bubble that we see in the multifamily space right now. And then we'll wrap up by talking about horizontal versus vertical scaling and how that applies to real estate. And I really hope you'll stay till the end because I think that's the most important part when understanding investing in single family homes. So if you're a bit familiar with real estate, you're probably familiar with the 1% rule. It's a really important, useful rule of thumb that says that if you rent a property for 1% of its purchase price, you're probably going to cash flow. So if you purchase a property for $100,000 and you rent it for $1,000 per month, that property is likely going to cash flow. Contrast that with, say, what's happening on the coast, where you may purchase a property for, say, a million dollars and rent it for, say, $3,000 per month. And you can quickly tell that it's not likely that that property is going to cash flow. It's an outstanding, quick, simple rule of thumb. I do think it can have a few interesting nuances that can make it a bit misleading. So let's talk about these two options. Let's say you have the choice of buying two properties for $100,000 each, and they each rent for $1,000 per month. Or you can buy one $200,000 property that rents for $1,800 per month. Which of these two options would you prefer? You might say, of course, number one, you have More properties, you have a higher gross rent. Option number two is clearly inferior because you only have one property and a lower amount of rents. However, I think there are a lot of considerations that supersede the 1% rule. And I can promise you that no matter the market or your circumstance, you're going to make more money in owning and investing. In option number two. I want to take some time to talk about some of those considerations. First and foremost, tenant quality. I could do a whole presentation about tenant quality. Tony Robbins directs us as business owners to build our business around our ideal customer. As real estate investors. Our ideal customer is our ideal tenant. That's someone who pays a high rental rate, who helps us to keep our operational costs low, who stays in that property for many years, who treats that property as though it's their own. When you have a nicer, higher quality property, you get a better tenant. That's just simple market dynamics at work. We really believe that the tenant is the true prize in real estate investing. No one invests in real estate and says, I'm just going to leave this Property vacant for 30 years. No, we invest in real estate to place a tenant so that the tenant can pay us. And so really, when we're investing in a real estate asset, we're investing in that tenant relationship. We think of that tenant as like our business partner. It's the person who opens up and closes shop, who keeps the lights on, who provides security for the property, who pays the mortgage, the insurance, the taxes, pays the utilities. And at the end of the day, when they leave, they ultimately seed all of the equity in that business deal, in that real estate investment. To you, the property owner, they are truly the best business partner you could ever hope for. And we think it's extraordinarily important to get the highest quality tenant you possibly can. Now, of course, this is an investment, and the numbers do have to make sense. I do think, though, if you can stretch your budget a little bit to buy a nicer property to attract that higher quality tenant, you're going to have fantastic outcomes. Let me be crystal clear. It's really that tenant that you're investing in, and it's much harder to attract a high quality tenant at a lower price point. Let's talk about vacancy and turnover. So many would say you'd rather have two of those $100,000 homes because it's unlikely that both of those properties would be vacant at the same time. And so it would hurt a little bit less if you did have vacancy in one of them. However, I Found in the lower price points, there's just a higher level of transient tenants don't tend to stay around for as long versus in higher end properties. So although our net rental rate is actually lower in that single Property at only $1,800 per month versus those two properties at $2,000 per month, our vacancy rate is also lower. And ultimately that translates into overall higher profitability with just that one property. Turnover is the number one cost to a property owner. And everything we've done in our business has been around mitigating that cost and mitigating turnover. We've worked really hard so that We've only had 1% vacancy across all of our single family home portfolio in all of 2020 because of how high of a cost turnover can be. Let's talk about maintenance and capital expenditures. So with just one property, you have just one roof, one water heater, one furnace, so on. Maybe the water heater and the furnace in that property are a little bit bigger in that $200,000 property than those $100,000 properties. But I think you would agree that that would translate to a pretty trivial price discrepancy versus having to own two of everything. Owning two of everything just doubles your maintenance and capital expenditure costs. And those are just pure costs. That gap in the gross rents is more than offset just by this cost center alone. Let's talk about appreciation. There's a spectrum to this, and you really need to understand the market that you choose to invest in and what the best neighborhoods are. But across most markets in the United States, the best appreciation is not at the bottom. In fact, those neighborhoods can tend to be somewhat stagnant and can maybe even have negative rent growth or negative price growth. So buying that home that's at the $200,000 price point instead of buying two $100,000 homes, you're almost always going to have higher total appreciation with the $200,000 home. And in many times it can be many more times depreciation. When you pick the right neighborhood, a median middle class, solid neighborhood with excellent schools, you're going to be right in that sweet spot for really good appreciation in most markets in the United States. So here's the twist. Those two $100,000 homes, they aren't single family homes. They're apartment units or a duplex or a triplex or a quad. It's very common when investing in real estate to look at the per unit cost or the per door cost. So for a million dollars, you can buy say five single family homes at $200,000 each or a 10 unit apartment complex for $100,000 per unit or per door at the end of the day. We manage many small multifamily properties, many small apartment buildings, and we found that there is a radical discrepancy in the total cost basis, the tenant quality, and overall the profitability between single family and small multifamily. If it's looked at by just that 1% rule or on a per unit cost basis, it can be very misleading and the outcomes can be significantly disconnected from what you might expect because of all of these considerations. So I mentioned here that the tenant is the real asset and I really can't emphasize this enough. The kind of tenant who lives in a single family home, they tend to be more self sufficient, more capable tenants than the tenants who live in a multifamily property. In fact, part of the reason someone might want to live in a multifamily property is because it's implied that they'll have to do less for that property or for the grounds like the lawn or the. No, it's just a radical difference in the tenant capability in a single family home versus a multi family home. We really like pets and pet parents. We've built up most of our business around attracting this type of tenant. These people love single family homes. There's a significant portion of the tenant base who calls our property management company each week looking for housing, who simply would never consider living in an apartment building because they love having a backyard, they love having a garage, extra privacy, all of the things that come with a single family home that just aren't part of the deal with multifamily homes. Now many apartments are becoming more pet friendly. They'll have things like dog parks. But I think you agree that it's just a completely different experience allowing your dog out into your own fenced backyard versus having to put your dog on a leash and walk to like a dog park in that apartment complex. We find these tenants to be extraordinarily valuable. They pay a steep premium for the property itself. They pay pet rent on top of that, they tend to stick around for several years to lower those turnover costs. And they tend to be the kind of tenants who take pretty good care of the property. We think when you are developing your real estate investment strategy, you need to think of your ideal tenant and build your business around that person. Let's talk about operational expense. So if tenant and tenant quality is the number one consideration in the difference between single family and small multifamily investment properties, I'd Say, operational expense is the number two item. I've hit on a couple of these things so far throughout the presentation. I want to take a minute here to summarize. In the interest of time, I do need to be brief here. Suffice it to say that in each of these categories, the costs are generally lower. With single family homes, and single family homes, you just have a relatively modest operational expense as compared to multifamily. So we talked a little bit about the differences in the maintenance that's required and the tenants willingness to kind of take on some of that small maintenance their self, and the difference between single family and multifamily in our own portfolio. With our actual experience, we have found that while our multifamily properties comprise the minority of our portfolio, they're actually the majority of our maintenance calls and our maintenance costs. Another really significant consideration, particularly in a cold climate like our own, we're in Rochester, Minnesota, is lawn and snow. So in our single family homes, we benefit from the free labor of our tenants who are responsible for managing the lawn, landscaping and snow clearance themselves. Whereas in our multifamily assets, that's just a pure cost to us as the property owner to maintain those grounds. We found that it can cost like an average of $75 or more per door per month to manage lawn, landscaping and snow in our multifamily properties. As you can imagine, that's a massive operation or massive swing in our total operational budget. In multifamily, the property owner is also much more likely to be responsible for utilities, like the water, the garbage, the heat, the electricity. At least maybe for some of the common areas, when the tenant's not financially responsible for those costs, they're just much more likely to waste resources to be careless with leaving the doors or the windows open to throw away things that aren't allowed in municipal trash, like old furniture or mattresses. 99% of the policing that we've ever had to do on utilities has been on our multifamily properties because our single family tenants are responsible for those costs and services themselves. So if they want to leave the window open or they want to place some bulky trash out and have an escalated cost for that, that's their financial responsibility. Other costs that are generally lower for single family are insurance and taxes. We pay about $75 per property for insurance on our single family homes. And we have found that for small multifamily that number increases to about 90 or even $100 per door because of the increased risk that the insurer is taking for those properties, there's several families living in, in one space. There's a, there's an exaggerated fire risk, for example, and most of those properties don't have like commercial grade fire suppression or sprinkler systems. Again, that's just a pure cost to you that adds very little value. Let's talk about taxes. So suffice it to say, taxes is usually your second largest cost after debt service. And in most areas the tax mill rate is higher, usually by a margin of about 20 to 25% for multifamily versus single family. And again, that's just a pure cost to you as the property owner with little to no real direct value to you or to your tenants. It's a topic that's really top of mind for me right now. I'm under contract for a $7.7 million townhome deal. Each of those townhomes has their own separate tax id. And so there's a lot of operational inefficiencies for managing each of those accounts. And people have recommended that we collapse it into one tax ID. But that would just raise the taxes by 25% simply by going from that single family non homestead tax rate to a multifamily mill rate in our area, just a pure cost. Let's talk a little bit about management. In a large multifamily property, like let's say 60, 100 or more units, where it's large enough that there can be an on site property manager and on site maintenance staff, management expenses may actually go down considerably for multifamily. So that is one area where that class will win. You know, management costs can get as low as like 2 or 3% for a very large apartment complex. But in small multifamily, you know, even buildings that are like 12 or 30 units, there are some economies of scale there, but those, those apartment complexes aren't large enough to have an on site property manager and on site maintenance staff. So it's all of the negatives of small multifamily. The increased maintenance, increased turnover, increased costs, without any of the benefits of being able to negotiate a lower management rate. So all in all, operational expenses tend to be much higher for multifamily as compared to single family. And that means that the net operating income for single family homes is higher, the yield for single family homes is higher, and that means you're able to keep more of the rent. Let's talk about getting into and out of a real estate investment. Again, we believe with starting with the end in mind, eventually you're going to sell this asset. Getting into the property is your very first step and it really sets the trajectory for that investment. There's a number of things on the slide I'm not going to have time to dive into, but I want to talk about at least a few of these. Let's think critically here about the difference between single family and multifamily properties. In any given market, there's going to be orders of magnitude more single family homes than there are multifamily homes. And just using statistics alone, that drastically increases the chances that you'll be able to find a good deal. You'll be able to find a seller that is selling quickly or is in some type of distress, like maybe there's a divorce or they're moving and you're able to get a good deal on that property. That also means that there are more Realtors who are very well versed in single family homes. You can tell them that you're looking for a good deal on a single family home and they'll know what that means because they have a lot more experience looking at those homes versus looking at multifamily properties. We have found that there are far fewer Realtors that have a true excellence in the multifamily space. And poor representation can cost you thousands or tens of thousands, maybe even hundreds of thousands of dollars across your investing career. Having high quality representation is critical to having great success in real estate investment. And you're much more likely to find a Realtor who has excellence with single family homes. Let's talk about distress for a little bit. So one difference I've personally noticed from looking at literally hundreds of properties of single family and small multifamily properties over the years is the difference in the expected quality between those properties. So a single family home is likely to be owned by an owner occupant who's managed it to those. I'm sorry, who's owned it and maintained it to those standards. And so when it's sold, it's going to be shined and ready for another owner occupant to buy it. If there's wear on the property, you might find a price reduction or a concession or something done at closing to accommodate for that. Whereas in multifamily, that property has almost always been a rental. And so the standards are just a little bit different. Maybe the carpet's worn out a little bit or the kitchen's a little bit dated, but it's good enough for a renter. And so there's just a little more distress in the physical asset. But we find that that distress doesn't confer a discount. And so it's easier to buy a high quality, very well maintained single family home than it is to buy that asset in the multifamily space. Let's talk about financing. The financing available for single family homes is just simply categorically superior to financing available for multifamily. So like a typical investment loan for a single family home, which would be a conventional loan, would likely be like 25% down. A 30 year amortization right at the second, you can lock in a rate like as low as 3%. So without going too deep into the weeds, when you get a conventional loan on a multifamily property, there's built into that a very significant penalty just for it being a multifamily property. So let's say you get a term sheet from a lender on a single family investment property. You might get an interest rate of, let's say, 3.25%. Now, that same lender, that same borrower, but now it's a multifamily property. The interest rate might be 3.75% or maybe 4% or maybe a higher down payment is required. There's a certain number of points that are allocated in Fannie Freddie underwriting just for being a multifamily property. That's like a penalty for kind of the same way like a borrower with a low credit score might have a slight penalty in the underwriting. Now all of that assumes that you can get a conventional loan at all. Multifamily loans often end up in the commercial loan territory for a number of reasons. And by default, a commercial loan is never going to be as good as a comparable conventional loan. Let's go back to that 1% rule for a minute. So let's say you have a choice of buying one single family home for $200,000 or one duplex for $200,000. But you know you're going to get an inferior loan product on the duplex. Well, just based on that information alone, it's likely that that's going to create lower overall returns on that duplex property. One thing I want to talk about that I think is really interesting is that I think it's harder to get into the game in multifamily assets because it's much more likely that there will be in place tenants. We consider that to be a really significant disadvantage. Now, there are other investors who would consider this to be an advantage. But hear me out. In our experience, the tenants that we inherit are significantly lower quality than the tenants. We place ourselves in the single family space. Almost all properties are vacant at the time of closing. This allows us to go in, make any improvements that we'd like, place a tenant, place that property into service, execute our business plan to get the outcomes that we want, Rather than inheriting the tenant in the business plan from someone else. We find that overall, buying a vacant property leads to much higher profitability. So there's a number of other factors I call out on the slide here. Suffice it to say, the end outcome for all of these factors is that there are a lot more opportunities for getting into the investment game in single family homes. Let's talk about exiting. We always want to start with that end in mind. Just as there are more entrants into the single family space, there are more exits as well. There are thousands of times more buyers in the single family space, which means this asset class is much more liquid. You always want to have as many exit options as possible because that gives you the highest likelihood that you're going to be able to get the best possible sales price for that asset. With a single family home, you can sell maybe to an owner occupant or to an investor, and you just have a lot more options there. One thing I want to talk about is that just like we don't like buying properties with tenants in place, we also don't like selling properties with tenants in place. We much prefer to vacate a property, do any necessary make ready, really get some shine on that property, and then take it to market. With a multifamily property, this is just much harder. It's harder to say, line up both of the leases so that they end at the same time. It can be hard getting those units vacated because of that. It's much harder to improve the property, to really get that shine on the property, to show the property. And then that ultimately makes it a little bit harder to get that optimal sales price. Finally, the majority of buyers in the multifamily space are going to be quite sophisticated. They're buying that duplex to invest, and that's going to make it a little bit harder to get top dollar for that asset. They're likely to offer less, they're likely to be stronger during negotiations. In single family homes, the buyers are maybe a little bit more naive, or maybe they're buying because that home is in a certain neighborhood or has a certain floor plan. They're not looking at that property like a business. Overall, all of this comes together to Demonstrate that it's easier to exit from a single family home. It's just a much more streamlined process. It's likely a process that many people listening to this presentation at least have some experience with. For example, let's pivot here to talk about the quality of multifamily properties. Because not all multifamily properties are made the same. Multifamily properties are much more individually unique as compared to single family homes. When you get into a large multifamily property, like let's say like a 50 unit apartment complex or bigger, at that point standardization returns and you're kind of comparing apples to apples again. But because of the complexities in small multifamily properties, we really think that investing in small multifamily properties without really truly understanding all of the intricacies can be pretty dangerous and can lead to suboptimal outcomes. Let's start by saying that a one unit property, a single family home, is better than a two unit property, is better than a four unit property, is way better than a three unit property. We strongly recommend to all of our clients that they stay away from three unit properties as much as possible. We really like duplexes. We find that there are fewer problems with duplexes compared with say triplexes, quads, or other small multifamily properties. I think if you can get a nice side by side duplex where each person can have their own front door, their own parking space or garage, maybe their own portion of the lawn, you kind of get that single family feel like there's a neighbor there, but kind of just barely. In a small multi family property, we think that side by side duplexes are categorically better than up down duplexes because up down duplexes have sharing of ceilings and walls and all of the noise complaints that go with that. Probably the most important thing to consider with small multifamily is the structure of the utilities. We could spend a few hours talking about utilities alone, which of them are split, which are master metered? How can you build back those master metered utilities that in a way that complies with your local laws or regulations? What common areas are you as the property owner responsible for? Do the units have separate thermostats, kind of separate from utilities? But also important is do the units each have their own separate laundry? Were the utilities the right size for that building as a multi family? So let's say we're talking about the sewer main in a single family home and later that home was converted to say a duplex or a triplex that inevitably is going to lead to more sewer problems, more clogged toilets, because more families are using that infrastructure than it was originally designed for. We personally won't even consider buying a multifamily property unless each of the units has their own electricity, their own gas, their own separate thermostats, and really even their own separate laundry. I think you really need to look at all of these things carefully because not all multifamily properties built or made the same. Let's talk about common areas like hallways, parking, the garage, the yard. In a single family home, this is all cut and dry. The tenant just has access to all of it. In a multifamily home, it can get surprisingly complex very quick. Who's parking? Where? Are there fees or leases associated with that? How do you manage if someone parks in the wrong parking spot? You really need to make sure you understand all of this when you're purchasing a multifamily home. And a lot of this isn't really easily captured on an estoppel agreement. So you have to have a really good understanding, especially if there are already tenants in place and leases in place in that multifamily property. If, as you're listening to this presentation, you really feel like you do want to include multifamily properties in your portfolio, I really strongly recommend that last bullet point there, which is to purchase a purchase purpose built multifamily property, particularly a side by side duplex. I find that those are the best opportunities in small multifamily. Let's talk a little bit about this potential multifamily bubble. I never want to be chicken little and kind of say this guy is falling. But one thing I think that it's critical to think about is what are other investors doing? What are other people doing? It's often good to do the opposite of what other people are doing. You want to be buying when others are selling and vice versa. Warren Buffett advises us to be greedy when others are fearful, and fearful when others are greedy. Right now I think we would all agree that there's a lot of popular advice like all the way from bigger pockets down to invest in small multifamily. It used to be that multifamily properties were a cheap way to invest. They were a way to get really high cash flow. You could get a lot more gross rents for fewer purchase dollars. Kind of going back to that discussion about the 1% rule. And today we're finding that that's just not the case. There's too many buyers out there in search of too few opportunities because investing in multifamily is really trendy right now. Five or 10 years ago, the shoppers who were in the multifamily space, they were principally investors. They were looking for high cash flow assets. Today, for our real estate team, we have a number of different people who are looking at multifamily properties. We've got buyers who want the house hack, which means they want to live in half of the duplex, rent out the other half, and then their family can live there for free. We've got investors who are very comfortable with low or no cash flow. It's a huge problem to try to compete with these buyers who maybe are able to cash flow because they're able to get a really juicy owner occupant loan. Or maybe they just have a very different profit motive than you versus the large number of single family homes that principally go to owner occupants. And so you're only, I wouldn't say you're only competing with owner occupants, but you're principally competing with other owner occupants. So because of all of this, we're seeing much lower returns in this asset class as compared to even just a few years ago. And we think when you add in all of the operational efficiencies, all of the escalated operational costs, it just simply kind of makes this an unattractive asset class compared to how it was, say five or 10 years ago. I think Covid has also had a pretty significant impact. Multifamily assets have had a much higher vacancy rate throughout Covid and especially compared to how they were doing even like earlier this year. And I just don't think they look as promising as single family homes right now. I've often wondered, is there this multifamily bubble happening? I can't say definitively, but I think these are some of the things you would want to think about if you're going to choose to invest in multifamily properties. Let's talk about long term outcomes. I think it's extraordinarily important to have a great deal of clarity around your strategy to reach financial freedom, as really that's your desired long term outcome. Through working personally with dozens of investors, I have found that a lot of people have a goal of reaching financial freedom, but they don't have a lot of clarity. And my hope here is to bring at least some clarity. So let's say you want $100,000 per year in order to have financial freedom. Let's say you're able to invest in some asset that Yields you a 10% cash on cash rate of return. I think that's getting harder to find in most markets. But for the sake of discussion, let's say you're able to find that. So how much cash do you need in order to achieve that $100,000 mark? Well, you'd need to have a million dollars in cash. So do you have a million dollars in cash right now, or how long do you think it will take you to get a million dollars in cash? I found from working with dozens of investors that many people have, say, several hundred thousand dollars, maybe a half million dollars. I have found it to be extraordinarily rare for someone to have a million dollars in cash liquidity right when they're first starting to invest in real estate. So one thing that's also uniquely challenging to us as physicians, and don't get me wrong, I think this is a great privilege that we have. But instead our income thermostat is a little bit higher. So if we're used to living on a physician income, maybe that $100,000 per year in passive income from our rentals, that might not actually feel like enough. So spiritually it feels amazing to have $100,000 per year in passive cash flow. It's a liberating, life changing feeling to feel like you don't have to go to your day job because your needs are met by the income from your rental properties, when you don't have to do something, when you get to choose to do it because you want to do it, because seeing patients brings you joy, because you like improving lives, you like saving lives, you like being a leader, you like contributing to the community, you like the extra income that working provides for you so that you can have maybe more luxuries, more vacations, maybe more money to invest. That's a radically different feeling than feeling like you have to go to work. So kind of no matter where you are on that spectrum of achieving financial freedom, as you move down the path toward your goal, you're going to feel more and more empowered. And that that's a very powerful feeling. But to really achieve financial freedom quickly and you don't have a million dollars in cash, you need to look not just at your cash on cash rate of return, but rather your total annualized rate of return. So in most real estate options, it's your equity that drives your wealth, not just your cash flow. Now, I do want to say I think it's critically important that you invest in something that has positive cash flow. So since my company's Name is Black Swan Real Estate. We have an inside joke of calling the really good properties swans, the bad properties gooses, and the properties that have negative cash flow, we call those alligators and we say the alligators will eat you alive. The alligators will eat up all of your swans. Absolutely no alligators. That's very important. But let's think about the annualized, the total annualized rate of return. So our clients, for example, usually get about a 25% annualized rate of return. Of that, about 6, maybe 7% comes from the cash flow. That's the cash on cash rate of return. And that remaining return is split somewhere between debt pay down and appreciation. I think multifamily is an interesting choice to make because there tends not to be historically the same level of appreciation that single family homes have enjoyed. So let's say you have a choice of investing in a single family home which projects out a 25% annualized rate of return and let's say a 6% cash on cash rate of return. So there is some positive cash flow, but most of the wealth is coming from the equity drivers of debt pay down and appreciation. Or you can invest in a multifamily property that delivers a 20% annualized rate of return, but perhaps a slightly higher cash on cash rate of return, let's say maybe 8%. So the total rate of return is actually lower because these assets tend to have inferior loan products with less principal pay down and they don't appreciate very well. Compared to single family homes. We've got that 25% versus that 20% total annualized rate of return. I think that's something you need to very carefully consider. So for ourselves, we're always looking at what's our fastest path to a cash out refi. We don't ever look at selling our assets. We're targeting an indefinite hold for all of our assets. We think that buying a property with a reasonably good deal, maybe doing some improvements, placing a premium tenant, managing that property competently, that allows you to get a cash out refi on that property, get all of your cash out, and from that point forward, you're then getting an infinite rate of return on that property, an infinite rate of return. You can then take that capital, buy another property and keep repeating that process. And I think you're on the faster track to doing those lucrative cash out refis when you have the higher total annualized rate of return that comes from single family homes versus small multifamily properties. If you do this for 10 years, you're going to reach financial freedom in short order. In a nutshell, this is what I have done to achieve financial freedom myself. It's what I recommend for all of our clients. When you're looking at that indefinite hold period, you want to have a long time getting that infinite rate of return. Now let's talk about the major objection to single family home investing, and that's scaling. So people will say, well, great, you can get 25% on a single family home, but how do you scale this? You have them all over town, and there's all sorts of things you have to do for all of them versus having all of your units in one apartment complex. If we agree that the point of investing is not just to provide for our needs, but it's to provide for our wants, then we're going to need to scale so that we can get that income that we're really looking for. Let's talk about vertical versus horizontal scaling. I'm going to do this with some analogies to the tech world, because I think we all understand that. Let's think of vertical scaling as making one thing bigger and bigger and bigger. And horizontal scaling is making more copies of one thing. So for decades in technology, computers would get twice as fast every few years. You'd have one big server, it would get faster and faster and faster. Around the year 2000, that really changed. That really slowed down. But we'd all agree that technology today in 2020 is better than technology was in the year 2000. And the reason that has been is because technology has had to abandon vertical scaling as a concept. It's really expensive to have one big thing. It's cheaper to have many copies of one small thing. It's also not very tolerant to have one big thing. If you have one big thing and it breaks, well, then you have nothing. If you have many small things and one of those small things breaks, then there's very little degradation in the behavior as a whole. In brief, that's the whole concept of vertical versus horizontal scaling. There are characteristics of vertical scaling in everything in technology, in nature, in architecture, in government. So, for example, the founding fathers agreed that it was more efficient to have horizontal scaling, to have 50 states with each with their own government, than it was to consolidate everything in one federal government. That's another great example that I think we can all understand. So how do we apply this to real estate? Right now, in real estate, there's a clear trend toward vertical scaling. There are bigger and bigger apartment complexes that are being built. There's a number of reasons for that we could get into. We unfortunately don't have the time. It used to be a very big deal to have, let's say a 100 unit apartment complex, and now it's only a big deal if you like 300 unit apartment complex or even a 500 or 1000 unit apartment complex. That is interesting because you get these huge economies of scale with having all of those units in one place. But it's also negative to have all of your eggs in one basket. What if there's a natural disaster or a disaster with management? Maybe that loan is called due? That's going to have a massive impact in a way that having say five 100 unit apartment complexes or even 500 single family homes is simply not going to have that major impact. We look at single family investing at scale as an opportunity to practice horizontal scaling. We've applied the concepts of horizontal scaling to our own portfolio and we think we've had terrific outcomes. So if repetition is the mother of all success, horizontal scaling is really powerful because it allows you to rapidly iterate and to continually improve. Every time we buy a single family home, we get a little bit better at it. We've built systems and processes to optimize every stage of the transaction and management of that asset. All of that is predicated on repetition to improve our efficiency and our competence. That's what has allowed us to scale in a really powerful way. If you do vertical scaling and on your very first deal, let's say you take down a 100 unit apartment complex, well, you're less likely to have a great outcome simply because it's your first time at it. By the time you're in your second, third, fourth iteration, you're going to be much better at it. It's going to be really hard to get that those iterative episodes because of the capital that's needed. We think this applies to small multifamily properties as well because of how complex they are compared to a single family home. So a single family home is going to cost less than a quad, for example. It's going to be simpler to purchase, it's going to be easier to close on, easier to place a tenant, easier to place it into service, easier to manage. All of that allows you to start quicker, to get through your proof of concept, get through your first iteration, to repeat that, to iterate and to continually improve. All of that means it's easier to scale. Mastery is what our ultimate objective is because that's what allows you to operate a large scale single family investing apparatus. When we look at the contracts we used to write, the vendor agreements, the finishes we did on our rehabs, let's say like 15 or 25 houses ago, we think, gosh, what were we thinking? We are so much better at this now. That's because we've done this 100 times. And that's going to be the case for you too. All of my experiences have shown that while there are some advantages to investing in multifamily, the yield in single family homes just simply can't be beat. As I've described through this presentation. The main reason people don't get into single family homes is because they think it doesn't scale. And I'm here to tell you that with horizontal scaling, you can be far more successful than using vertical scaling in real estate. And that single family can scale. Let's put our money where our mouth is. So for us, this is something we do every single day. We talk the talk, we walk the walk. At any given time, we might have ten or a dozen of these single family deals going. We can easily place a million dollars of capital in any given month. For the active clients that we represent, we typically get about a 25% annualized rate of return. These are people who use our company for a real estate agency to purchase a house and then can manage that property. For clients who invest in our company, we give them a 10% fixed rate of return. We've done this with millions of dollars. We've returned hundreds of thousands of yield. When we've looked at alternate investments, we've just simply struggled to achieve these same amazing outcomes. We've written offers on several apartment complexes. We've gotten plans together to do a ground up development of an apartment complex. And none of those have really ever come close to the outcomes we've had with our single family home portfolio. Right now we are under contract for a 7.7 million dollar townhome deal. We love that this is giving us that single family investing experience. But we're able to buy a lot of them in one transaction. We love that each of these townhomes has its own tax id. They each have its own utilities, front door, garage, yard. There are no common areas, there's no common amenities. It's all of the benefits of a single family home. There's just a lot of them in one transit. So it's been a really good compromise for us as we scale. So if you've come this far with me, I really want to thank you. I really appreciate your time. I hope this has been informative more than anything. I hope it's been inspiring. I hope you're able to see single family investing through a new lens and see how you can apply these concepts to starting and rapidly scaling your own real estate investment portfolio so that you can reach financial freedom. If you have found this content valuable and you'd like a deeper dive, I'd encourage you to sign up for a free mini course I've put together with several video modules. You can find that at BlackSwan Real Estate signup. I'd also love to answer any questions you have, be a resource to you in any way. My email address is elainelackswanteam.com I'd love to hear from you if I can help in any way. Again, thank you so much for your time. I'm very grateful for you. Thank you.

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