{"id":91681,"date":"2017-09-05T05:00:50","date_gmt":"2017-09-05T11:00:50","guid":{"rendered":"https:\/\/www.biggerpockets.com\/renewsblog\/?p=91681"},"modified":"2021-03-16T13:38:44","modified_gmt":"2021-03-16T19:38:44","slug":"5-sfrs-or-5-mfrs","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/5-sfrs-or-5-mfrs","title":{"rendered":"Should You Invest in Five Single-Family Units or a 5-Unit Multifamily?"},"content":{"rendered":"

I\u2019ve heard more and more people ask lately whether they should buy a handful of single-family residences<\/a> (SFRs) or one larger multifamily residence <\/a>(MFR). Regardless of how many properties or units you are considering, the question remains\u2014buy several SFRs, or one MFR?<\/p>\n

There are essentially two questions embedded in this one question, and you should evaluate the pros and cons of each in order to determine which is right for you:<\/p>\n

    \n
  1. SFR or MFR?<\/li>\n
  2. Residential or Commercial?<\/li>\n<\/ol>\n

    Residential MFRs can hold up to four units. An MFR with more than four units is considered a commercial property. So let’s consider the questions I’ve posed, beginning with the first:<\/p>\n

    SFR or MFR?<\/h2>\n

    As with most things, there are pros and cons to both options. For more detail on comparing the pros and cons of SFRs vs. MFRs, read\u00a0this,<\/a>\u00a0in which I further explain the two types of properties and what to consider before investing in one.<\/p>\n

    In less detail, the factors I consider when weighing SFRs vs. MFRs are as follows: property cost, financing, maintenance expenses, management, vacancy expenses, cash flow, location, tenant quality, tenant turnover, appreciation, and exit strategy. <\/em>In my opinion, there\u2019s no right or wrong answer to which one to buy\u2014SFR or MFR\u2014when you are only considering residential properties. The only time you can go wrong is if you invest in an MFR that either has the same cash-on-cash return, or a lower cash-on-cash return, as an equivalent SFR. This is because typically MFRs come with slightly more inherent risk, due to the lower tenant quality and higher tenant turnover that can come with multifamily units.\u00a0[Note: As with anything, my advice is completely dependent on individual situations.]<\/p>\n

    Related<\/strong>: The 7 Vital Steps to Buying a Single Family Rental House<\/a><\/em><\/p>\n

    If we are comparing apples to apples with SFRs vs. MFRs, the MFR should come with a higher proposed or advertised cash-on-cash return, because you assume more risk with an MFR. There\u2019s no point in taking on a lower return if you are still running at higher risk levels. I am only willing to accept lower returns if there\u2019s a tradeoff\u2014that I\u2019m investing in a lower-risk property. Make sense? If you aren\u2019t overly familiar with calculating cap rates<\/a> and returns, this article<\/a> will help you get up to speed.<\/p>\n

    For the most part, I believe that the pros and cons of residential SFRs vs. residential MFRs tend to balance each other out. There isn’t necessarily a wrong decision.<\/p>\n

    \"\"<\/p>\n

    Ultimately, what you should first consider with either type of property is the numbers. Which scenario offers the highest returns? Whenever considering which properties to invest in, always run the numbers first.\u00a0If the numbers are similar, the next things to consider are your own personal interests and risk tolerances: Maybe you’ll love the look and feel of a particular SFR so you’ll buy it. Or maybe the idea of having more than one unit under one roof really gets you excited. Maybe the idea of multiple units terrifies you, or you are absolutely bored with the thought of simply having a single unit.<\/p>\n

    Related:<\/strong> Single Family Homes vs. Multi-Unit Apartments: Which Investment is Right for You?<\/a><\/em><\/p>\n

    Remember that certain markets may be more favorable than others for SFRs or MFRs. In some markets, it\u2019s often easier to get a good cash-flowing SFR over an MFR. When investing, I’ve worked within several states at a time. And at any given moment, half (or less) of the markets I\u2019m working in offer good cash flow on MFRs. More than once, the markets that have offered good returns on MFRs have offered significantly higher returns on MFRs than on SFRs. So again, it\u2019s really all about the numbers. Depending on what the numbers look like, you may not even have to think too hard about which type of property to buy.<\/p>\n

    Now that you have a general understanding of SFRs vs. MFRs, let\u2019s move on to the second question:<\/p>\n

    Residential or Commercial?<\/h2>\n

    As you may have guessed, there are pros and cons to both residential and commercial property investments.\u00a0Keep in mind, I\u2019m creating this pro list to address buying several SFRs vs. one larger MFR, so a consideration like \u201centry price\u201d will not be included since I\u2019m assuming the price will be similar for either purchase (ie. buying five SFRs vs. one 5-unit commercial MFR).<\/p>\n

    Residential pros:<\/strong><\/p>\n