Pros & Cons: Single family & Multi family

2 Replies

Hi you guys, I am trying to organize thoughts around single family vs. multi family.  I’d like to be confident and knowledgeable enough to articulate the rationale for either niche. 

This is my work-in-progress list. There are some assumptions in here that vary, but I tried to capture what it might be ‘on average.’ I’d love to get your perspective and build on this. 

Single family

Pros

- available at every price point

- easy to understand

- comps are relatively easy to determine

- numerous exit strategies available

- less complex to rehab

- less complex to BRRRR

- better likelihood of natural appreciation

- Less turnover

- Fewer tenant headaches

- Tenants pick up most/all of property expenses (also, no common areas)

- Tenant more involved in upkeep

- More financing options

Cons

- a lot of competition (regular buyers, other investors)

- inherently slower to scale than multi family

Multi family

Pros

- scale up is built in

- more cash flow vs amount invested? compared to single family?

- More units over which to spread costs

- Bigger deals in which investors can be brought in

Cons

- fewer available exit strategies

- harder to rehab assuming occupancy

- less natural appreciation (investors always want a deal)

- owner more likely to pay some utilities

- higher percentage of vacancy / more turnover

- generally lower caliber of occupant than single family (more hassle)

@Matt Ferch , you hit many of the high points. There are some of your pros/cons that I would strongly disagree with:

SFH Pro:

  • "Available at every price point" Wrong. In my neighborhood the cheapest SFH is $700k. The cheapest in the entire town is $550k. No SFH would make a good rental property at those prices because you simply can't charge rents high enough to cash flow. The opposite is true as well. Plenty of communities where home prices top out at $200k.
  • "Comps are easy to determine" Maybe. If you live in an area with tract homes, sure. Easy to find comps. In more mature markets where there are 100+ years of stock and decades of in-fill construction, ARVs can be very difficult to determine.
  • "Less complex to rehab" Disagree. There may be less to rehab (1 kitchen vs. 4 or more), but that doesn't make it less complex. In fact, I would argue that once a contractor has done one unit, the next ones in the same property will be far easier. They've gone through the learning curve for the property, identified its quirks, and honed in on what's actually required. Plus, the contractor is only at one job site, significantly reducing set-up and break-down time and effort. If you're rehabing 4 SFRs, each one is a different animal.
  • "Less complex to BRRRR" Why?
  • "Better likelihood of natural appreciation" No. While rental and sales trends are not directly correlated, if there is increasing demand for housing, both will be expected increase in value. Additionally, 2-4plexes will track the residential market.

MFR Pros:

  • "More cash flow vs. amount invested" Not necessarily, very market and property dependent. But I do agree that MFRs generally provide economies of scale at a lower per-unit cost.
  • "Bigger deals..investors" No. Investors can be brought into any size deal.

MFR Cons:

  • "Harder to rehab assuming occupancy" Disagree. With a MFR leases timing is likely to be staggered, so you can reno each unit as lease expires. With SFR, there's only 1 lease to wait for, which could be 11 months away.
  • "Less natural appreciation" Addressed above, but the real headline here is that with 5+ unit properties appreciation can be forced. Increasing NOI (though lowering expenses and increasing income) instantly ups a property's value. This simply isn't possible with a residential property, no matter how profitable it is.
  • "Higher vacancy/turnover" Maybe. But this is much more dependent on the local market.
  • "Lower tenant quality" No. In fact, I would argue that getting an A-class tenant in SFR is very difficult, because the kind of property they desire simply don't make profitable investment properties. There is a large market for A-class rentals in most urban/suburban markets. These tenants are typically well paid, white-collar workers, often dual-income families.