Multifamily and single-family homes both make for great real estate investing. But as with anything in real estate, there are pros and cons to both kinds of rental properties, and you likely have many questions.
If you are only trying to buy one property right now, which one should you pursue? If you are buying your very first rental property, which one should you start out with? To help get you started on your real estate investing journey, we’ve broken down the pros and cons of each rental property type and packed in some expert advice.
What is a single-family rental? What is a multifamily rental?
Before checking out our breakdown of the pros and cons of a single-family rental (SFR) vs. a multifamily rental (MFR), you’ll first need to understand the different types of rental properties. Understanding this may even help you think ahead to the different financing options.
An SFR is a residential property with only one unit, meaning the property is like most typical houses, rather than a duplex or triplex, which are usually intended for multiple groups of tenants.
One unit means one set of people living there, regardless of whether they are one nuclear family. A set of people can mean anything from a single person or an extended family to roommates or romantic partners.
An MFR is a residential property with two to four units—meaning two to four separate sets of people live there.
Keep in mind that if the property is larger than four separate units, the property becomes a commercial residential property. This affects the type of financing you would receive, as residential loans are quite different from commercial loans.
Single-family rental pros
Less expensive to start
Most single-family properties are far cheaper than an apartment building. That means you can start buying investment properties which much less capital—and a much smaller down payment. This can be an attractive real estate investing option for those who want to pay all cash or have little money to put down.
Keep in mind that if you are taking out a mortgage loan on your rental property, lenders limit the number of mortgages you can have, typically at 10.
In addition to being less expensive to start, SFRs can be great on your taxes. Residential rental properties are the single most-tax-advantaged asset class in the tax system. Writing off five separate properties on your taxes can be freakishly beneficial to your bank account.
Greater resale opportunity
For real estate investors, another bonus to buying an SFR is its opportunities for resale. The long-term appreciation—or increase in property value—of a single home can be huge.
There are far more buyers for single-family homes than apartments. In fact, individual homes can be sold to retail home buyers (including first-time home buyers and those downsizing), house rehabbers, other buy-and-hold investors, builders, cash buyers, or on a seller-financed basis.
If you are looking for appreciation value in your rental property, SFRs will almost always appreciate more than MFRs. Just make sure you pay attention to which neighborhoods are appreciating in your city—and make sure those neighborhoods support single-family rental properties.
There’s also an increased demand for single-family homes, considering that there are five million home sales in an average year. For those wanting to pursue the “American dream,” renting a single-family home might be a great choice before transitioning into buying their own home one day.
And with more single-family homes being built, this means more single-family home choices to invest in. The possibility of finding better deals and doing a higher volume of transactions increases.
Lower tenant turnover
Renters of single-family homes are less likely to move from the house in which they have developed bonds with neighbors, settled into school districts, and helped transform the house into a home.
For many people, apartment life—especially in cities—can be a wonderful yet temporary living situation in which to finish school or start a career in the midst of all a city has to offer. Tenants of apartment buildings might not develop an attachment to their living quarters if they see the MFR as a stepping stone.
Cons of single-family rentals
Less cash flow
Since a single-family residence would only include one set of people, a drawback to investing in single-family rental properties might include limited cash flow in the form of rental income. If tenants can’t pay their monthly rent or they need to move out, you might find yourself paying the full mortgage.
Also, since the home is not an apartment or other multifamily residence, there wouldn’t be any shared spaces that could take up the burden of work if something breaks on site. For example, if an SFR’s washing machine breaks, you would have to repair the machine right away, whereas some MFRs have multiple washing machines to be utilized.
Vacancies can cost you
You may find yourself covering the home’s mortgage without the help of the money the renters would provide. Zero income from a rental property is tough with a mortgage payment because then the mortgage payment has to come straight out of your pocket.
Hard to scale
Having one single-residence property might pose challenges to your investment portfolio if it is underperforming. To mitigate this problem, sometimes owning multiple SFR properties makes sense because they can help carry the weight of a lower-performing SFR. You could even sell the low-performing property while keeping the high performers, continuing to optimize your investment portfolio.
In other words, your metaphorical eggs will be spread throughout several baskets—and you can even spread those eggs out in different geographic locations to further diversify your portfolio. Get creative in your real estate investing.
Pros of investing in multifamily housing
Scale investment portfolio faster
One of the greatest benefits of multifamily property investing is the economy of scale. That means you can build a sizable real estate portfolio for less. Apartment buildings typically have a lower cost per door, property management is typically more effective and profitable, and any improvements made can help to lift the value of many units, not just one.
For example, if you put in a pool, you are adding the value of a swimming pool to every unit in the community. For those with really big goals, multifamily property investing can help make some big leaps.
More monthly cash flow
If one unit in an MFR goes vacant, you are still receiving income from the other units. Also, the maintenance costs for a multifamily rental will be lower. Because of the shared walls, yard, and whatever else, maintenance expenses are often reduced because similar amounts of materials and labor can cover more at once.
Moreover, multifamily property investors also enjoy more control over their income and asset values. Properties like this are valued on their net income, not comparable sales. Landlords have the freedom to not only adjust rents, but to increase operational efficiency and augment income with factors such as laundry, internet service, and more.
You can live there
Lastly, a major pro to investing in an MFR is the fact that you can live there too. By occupying one of the apartments, you can save money by not having to pay for another property in which you would live. Plus, being on-site can allow you to work as the property manager, which can grant further cost savings since you wouldn’t have to pay someone to manage the building on your behalf.
Cons of investing in multifamily rentals
Large-scale tenant screening may miss red flags
One of the biggest shortcomings of an MFR is the possibility of frequent tenant turnover. Some owners may be tempted to conduct a large-scale tenant screening to get rents in sooner. Plus, you may not be able to self-manage multiple units. A property management company’s screening may not be as thorough as yours.
But this can lead to further expenses down the line if a tenant cannot afford the cost of living in the MFR. As soon as you are replacing tenants every year or two, your expenses can jump pretty heavily.
Financing can be harder
Financing a multifamily home can be challenging, especially if you are a first-time investor. Banks may also need a more fully fleshed-out business plan if they are going to consider lending money.
Management can be complicated
An MFR will be more intensive to manage because it will have more tenants with more maintenance calls, so you may wish to hire a property manager.
However, bear in mind that the cost per unit will always be cheaper with an MFR. The overall cost of the whole property might be more than an SFR, but the cost per unit is lower. So you are getting more bang for your buck in terms of how many “doors” (the cool person’s lingo for units) you get.
Harder to sell eventually
Typically the only people interested in buying MFRs are investors. And what do investors always want? A deal. You likely won’t get an investor to pay top dollar for your property, whereas you can easily get top dollar from a primary homebuyer. So in terms of selling your property, you have more options with an SFR than an MFR, not only in terms of how much you can sell it for, but also who you can sell it to (larger pool).
There are pros and cons to both single-family and multifamily homes as rental properties. The good news is that both are great real estate investments, although there are certainly some tradeoffs.
Ultimately, which type of property you decide to buy needs to be based on your comfort level. If you are a nervous first-time buyer and want as little risk as possible, maybe steer towards the SFRs. If risk doesn’t scare you and you only care about maxing out cash flow, go for an MFR. If you are buying more than one property, buy some of each! Diversification is always great. Having some of both may allow you to spread the benefit and risks more evenly.
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.