Multiplexes vs. Single Family Rentals: Which is the Better Rental Property?

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When I first became a landlord, I assumed that multi-unit properties would generally be the best investments. I imagined myself exclusively owning triplexes and quad-plexes.

But as the years have gone on, I’ve grown to love single-family residences (SFR’s), as well.

In this article, I’m going to compare multi-units and SFR’s. I like both of these types of properties, both of which have benefits that are quite different from one another.

(As a note: In this article, I’m discussing small residential multi-units of 2-4 units.  I don’t have any experience with larger, commercial multiplexes … at least, not yet.) J

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Advantages of a Multi-Unit

 #1: More Building, Less Land

In a rental-property situation, the underlying land is a non-performing asset. What does that mean? You make money on the building (specifically, on rent from the tenants occupying the building), not on the underlying land. Yes, that parcel of land may rise in value, but your strategy is based around monthly cash flow, not long-term capital appreciation.

Multi-units allow you to consolidate multiple rental units on the same parcel of land, thereby allowing you to maximize your performing asset (the building units) while minimizing the “overhead,” so to speak, of the underlying land that you’re required to purchase.

#2: Consolidated Overhead

A multi-unit building has only one roof, one set of gutters, one basement or crawl space, one yard that needs termite bait stations and pest control. This represents consolidated overhead. Rather than pay to replace four unique roofs on four SFR’s, you can replace one roof on a 4-plex.

#3: Easier Property Management

Why drive to four properties when you can drive to just one? Property management can be easier in a multi-unit, since a trip to one building can allow you to visit many more tenants.

#4: Create a Rising Price

The “value” of the house will largely be a reflection of your gross and net rental revenue. That means that even in a stagnant economy, where home prices aren’t moving, you can “force” your property to rise in value simply by stepping up your game and becoming a better manager. If you can cut operating expenses and/or raise the rent, you’ve just caused the value of the property to rise – regardless of what’s happening in the overall economy.

Related: How to Buy a Small Multifamily: a Step by Step Case Study

Advantages to a Single-Family

That all said, SFR’s possess some distinct advantages, as well.

#1: Less Maintenance

Depending on the customs and norms in your neighborhood, many tenants who live in SFR’s are responsible for taking care of their own yard. They rake their own leaves, mow their own lawn, and pay for a ticket from the county if they’re cited for having grass that’s too long.

In a multi-unit, however, the landlord is usually assumed to be the responsible party. Yard care is more likely to be your responsibility, rather than the tenant’s job.

#2: Lower Utility Costs

In some cases, landlords for multi-unit properties are expected to pay for certain utility costs like water or trash, particularly if the units aren’t individually metered. In SFR’s, however, tenants often shoulder the entire cost of utilities, including water and trash.

This is a case-by-case point. It depends on the laws, customs and norms of the specific area that you invest in. It also depends on how your multi-units are metered.

My point is more general: if you’re comparing two investments, one of which is a multiplex and one of which is an SFR, you may be more likely to have to pay for some utilities in a multiplex.

#3: Easier Parking Situation

SFR’s generally have straightforward parking situations. Many have garages or carports, and most have driveways.

Multiplexes, on the other hand, have more varied and complex parking situations. Some have parking lots, which the landlord is responsible for maintaining. Others have only street parking, which is less attractive to tenants.

#4: Higher Rent and Lower Vacancy

Depending on the preferences and tastes of the tenants in your area, you might be able to command higher rent and enjoy a lower vacancy rate on your SFR’s. Some tenants prefer having their own house, rather than sharing a multiunit with other renters.

Of course, this depends on your area – no one in lower Manhattan is looking for an SFR. But if you’re buying property in an area where SFR’s neighbor multi-plexes, you might find that tenants prefer SFR’s, all else being equal.

#5: Re-sale

I know, I know – as a buy-and-hold investor, you don’t imagine yourself selling the home. But if you do decide to sell, your SFR can be marketed to both owner-occupants as well as investors. Your multiplexes, on the other hand, will compete for a smaller buyer pool exclusively comprised of investors.

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So which is better? I don’t think there’s any “right” answer. I like them both. When I first began investing, I thought I’d adhere exclusively to small multi-unit properties (2-4 units). But I’ve developed a love for SFR’s over the years, as well.

Which do you prefer – multiplexes or SFR’s?

Photo: Jess Zimbabwe

About Author

Paula Pant

Paula Pant quit her 9-to-5 job, invested in 7 rental units, and traveled to 32 countries. Her blog, Afford Anything, shares how to shatter limits, build wealth and maximize life. (At AffordAnything.com, she shares EXACT numbers from all her rental investments -- costs, cash flow, cap rate; it's all published for the world to read.) Afford Anything is a gathering spot for a tribe dedicated to ditching the cubicle. Read her blog, and join the revolution.

23 Comments

  1. Nice job Paula.
    I prefer single family since I can find better deals on them because there is more of them. I see a lot of distressed SFRs and very few distressed multi family units.

    One surprise I had this year, was three of my rentals had an oil company drill below my rentals and I received a couple hundred dollars in royalties off each one. It was directional drilling and the drill sites did not affect my properties at all. That was one benefit to having a separate lot with each property.

    • Mark, that’s awesome! You’re the first landlord I know who gets income (cash flow) from his underlying land! That’s really cool … I’m jealous! (And because you didn’t know about the oil under the land when you bought it, you didn’t have to pay a premium for that parcel of land! Double bonus!)

  2. Paula, I totally agree with you. Having invested in both for many years, I find SFR far better and more stable. If you have a bad renter in a SFR, evict them. In a multi-unit (in my case) a non paying renter is like a virus, a lot of the other units will copy them. I had an 8 plex where I was doing more maintenance and repairs on (8+ hours a week) then ALL my SFR (about 8 hours a month) put together. I admit that there was a lot of potential for cash flow, just never saw it.

  3. Another thing about a SFH is that tenants (at least in my area, this might be local) prefer living in the SFH over the apartment complex. You tend to get a better quality tenant.

    • That’s definitely true. I’ve actually found, in my area, that tenants don’t mind living in “large” multiplexes (4 units or more). But when it gets down to “duplex” levels, they start jonesing for an SFH. I suppose they want one extreme or another — either an “apartment”-style feeling or an SFH experience.

  4. Multi-Family allows for a reduced risk level. If your tenant doesn’t pay rent in an SFR, you have zero income for that period. If some tenants do not pay in a multi-family, you’re out some income, but not all of it.

    Also, you can force appreciate a multi-family property but not an SFR. This makes huge financial sense. Let me give you a quick example of a forced appreciation situation:

    EXAMPLE:
    You purchase a multi-family for $20,000 per door with expenses running at 80% of income. The income is $600/mth per door. Let’s assume for this example that this is a 50 unit. Total Annual Income using a 15% vacancy/rental loss factor = $600/mth x 50 units x 12 mth/yr x 0.85 (occupancy) = $306,000. With expenses in our example running at 80% of gross income, the net operating income (NOI) = $306,000 x (1 – 0.80) = $61,200 / year. This is before ANY debt service.

    Now, by buying a management related problem property (not a distressed property), let’s be smart and reduce expenses to 50% of income (which is approximately where a well managed multi-family of 50 units should be), and the NOI is now ($306,000 x 0.50) = $153,000.

    We purchased the property for $20,000/door x 50 doors = $1,000,000. The capitalization rate (CAP) was $61,200/ $1,000,000 = 6.12%. (This is on the surface rather poor!), however, we saw the value in the numbers and assuming that a typical investor wants a 10% NOI to buy your property…..well, here’s the result now, force appreciating the property with the math telling all:

    Now, the new NOI = $153,000. If we are marketing the property to sell it now, and the Buyer is looking at buying a 10% NOI, the property is now worth:

    $153,000 / 10% = $1,530,000.

    Remember, in this example, we bought a property for $1,000,000 and have now “Force Appreciated” it to a value of $1,530,000.

    Before expenses, this is an increase in value of more than 50% or about $500,000 and all we did was fix the management and control our expenses to where they should be. No hammer was swung, no demolition, no dirt, just using your mind.
    Now, isn’t that beautiful?! Try doing that with your single family….you can’t. This is one big reason why I love commercial properties.

    • I agree with Alex. After purchasing and managing both types, I prefer multifamily because, based on my personal experience, the profit margins are higher. The inefficiencies of under-performing multifamily properties allow you the opportunity to acquire them at a deep value-added discount, and to force appreciation by filling vacancies and off-setting expenses.

      Expenses can be off-set by sub-metering utilities as you fill vacancies and stabilize the property. The off-setting of expenses increases your Net Operating Income, which further increases the value of the property.

      Also, based on my personal experience and in my opinion, it’s a lot easier and less expensive to maintain 1 roof, 1 plumbing system and 1 electrical system of a 50 unit apartment complex, as opposed to 50 roofs, 50 plumbing systems and 50 electrical systems.

      Although I do agree that renters to prefer SFR, obtaining and retaining quality tenants is based on the one’s own management efficiencies.

    • Mike McKinzie on

      Alex
      The same thing can be done with SFR. Let’s take my last purchase for example, which was in June. I purchased a SFR for $40,000 that was already rented for $650.00. The seller was desperate and needed a fast sale, which is very common and easy to find these days. So let’s take your $1,000,000 and buy 50 of these, $1,000,000 down and $1,000,000 borrowed. My gross monthly income is $32,500 and my month mortgage payment at 4.5% is about $5,000. If I use the 50% rule, my expenses including vacancy, will be $16,250. So my monthly net is $11,250, not counting other benefits like depreciation (which is twice what yours is because I paid $2,000,000), mortgage interest deduction, etc…. I can also report that with good management, I can get that 50% down to 40-45% as I negotiate management fees (6% instead of 10%), stay on top of maintenance and not allow deferred maintenance to build up, and other wise savings.

      The value of the house when I purchased it was $50,000 but I convinced the seller that bypassing Realtor Fees and Closing Costs, they would net $40,000 and I am willing to pay that and avoid all closing costs. In 2005, these houses were selling for over $100,000. Next, the average rental amount in this neighborhood is $750 a month, but the tenant is a retired elderly man is on a fixed income so I am being a “good citizen” and am going to only raise the rent $10 a month.

      Using your example, I would make $500,000 on the day I closed, plus a good chance I would double my $1,000,000 investment in 2-3 years. (Unfortunately I don’t have $1,000,000 in cash but each time I get to $40,000-$50,000 I buy another one).

      Multi unit investments can be a great avenue to making money, but my experience has shown other wise. I had one tenants car catch fire and burn the entire garage down (luckily it was separate from the building). I had an upstairs tenants overflow the toilet and flood the downstairs unit as well. I had one drug user move into a 32 unit property, without me knowing he was a drug user, and within a couple of years, half the units had druggies in them because the non drug users kept moving out and druggies were the only ones who would move in. The added benefit here was rent went from $500 a month per unit to $200 a month per unit. But there are upsides to units as well, mainly “economies of scale.”

      SFR and Units can be good investments with good returns, it is just different strokes for different folks.

      One final thing I like about SFR is that I can sell one door if I have an emergency and need to get some cash. Plus the market of buyers is larger for SFR than for Units making it easier to sell them.

      So don’t knock SFR as a good investment. It can be a great way to make money. Oh yea, I never even saw the house I just purchased so not only did I not swing a hammer, I never even left my house.

      • Mike,

        Your example takes my statement slightly out of context, so let me clarify for you. I never said SFR’s were not good investments. We buy them all the time as well. Second, you cannot sell an SFR based on cash flow readily. You are talking apples to oranges here Mike. SFR’s as I’m sure you’re aware are sold based on what someone emotionally is willing to pay for it and it’s almost always based on local comps in the past 90 days. This has zero to do with cash flow. Additionally, commercial properties are $$$ driven only. There is zero emotion involved. A Buyer pays for the cash flow and that’s pretty much it. On an SFR, you can have the greatest cash flow in the world, but you aren’t going to sell it based on that, but on what the property is worth. There is no comparison between MF and SFR in this case because their valuations depend on entirely different approaches and investors make decisions based on those common standards.

        Also, your examples of bad tenants are rather typical. I’ve had bad tenants too. I had a guy attempt to commit suicide by slitting his wrists. He damaged a brand new carpet with his blood everywhere (he survived his attempt). I’ve had drug users throw their used needles all of the house (I didn’t know they were drug users). So I’ve had the horror tenants too, and since those early days, by implementing a strict tenant screening process in conjunction with the property managers processes, these problems only very rarely happen. I’m sure you have made some changes to your approach as well as this comes with experience.

        When you mention in 2-3 years you “could” double your investment, this may in fact be true. This is exactly what people were thinking in 2007 / 2008 when they bought then, and we know exactly what happened with that idea. Investment is not about hope, it’s about prudent and effective plans in advance of a purchase. Hoping for appreciation is not a sound plan. You may be right, and you may be wrong using this approach. For many people a few years back now, they were VERY WRONG and lost huge using that idea. In commercial, you don’t hope, you manage and know your numbers beforehand. Afterwards, market appreciation is not something you need to worry about because it’s not part of the plan. If it happens that people are willing to accept a lower CAP later on, then all the better, but typical investor expected returns really never change with time. This is why our MF approach is so effective. Investors who want stability are looking for 8-12% return year after year, so there’s the target. Beautiful, isn’t it!?

        People who buys stocks and bonds also must have a bias. Sometimes it works and sometimes it doesn’t. For the amateur investor, it doesn’t work more often than it does. I prefer to buy property without a bias and not having to hope for anything. Investing this way works 95% of the time. I love those odds.

        Again, we still buy SFR’s all the time, when they make sense to us. We just prefer MF’s when they are purchased according to our criteria.

  5. Paula, Good article and comments. Couple things to ad. Multi-units may be zoned differently, allowing for signs (“I Buy Houses,” or even a small ads or billboard = extra revenue). Also, I’ve been splitting the utilities on most of the duplexes I’ve bought recently. Costs vs return are usually favorable, plus it discourages overuse of utilities at my expense. Plus tenants often qualify for “fuel assistance” (I don’t, even though tenants pay for it via their rent) and even if they don’t, it allows me to advertise a lower rental price than the units that include heat, giving a bit of a competitive edge there. Splitting utilities works best when the tenant/user gets stuck with the bill when it’s not paid, meaning I don’t have to pay it. Many cities who run their own public utilities stick the owner with unpaid bills, and that can be a rude surprise.

  6. Michelle Marty on

    I have both and I much prefer single families. I have a 9-5 and then rentals on the side. I have 6 single families and 1 multifamily (4 plex) the multifamily takes way more work than the single families. The tenants complained more, we’re late on rent more often and required far more attention. I ended up hiring a property management company for the 4 plex because it was more than I could handle. I still self manage the single families. On paper the multifamily is a much better investment but in reality the turnover is so much lower on my single families that the profit is better because it isn’t getting eaten up repairing and prepping for new tenants.

    • @Michelle — You sound a lot like me … I have 3 SFR’s and one triplex, plus a full-time job that’s unrelated to real estate. I self-manage 2 of the SFR’s and the triplex, and I’ve outsourced one SFR to a property manager.

      The SFR that I outsourced requires more “tenant management” because of the neighborhood that it’s in. The triplex, on the other hand, is located in a top-notch neighborhood and is marketed as a luxury rental (granite, stainless steel). So even though it’s a multiplex, it gets better tenant quality than my SFR’s.

      I tell that story to illustrate that neighborhood plays a large role in determining turnover / tenant quality … possibly a larger role than a single/multi setup.

  7. Economies of scale with multifamily properties that share building elements such as the roof, foundation, and common areas, is a big savings. In addition, having multiple tenants located in together will save you time when maintaining and managing your properties.

  8. Nice article. I agree with your commentary. We have a number of SFH and Duplexes, Tri’s, and Quad’s. I prefer SFH’s in good areas as it gives you much better exit options and with the lack of income-approach appraisals in the past several years, I’ve found it difficult to finance or sell the multi-unit properties….but for all cash, the Quad’s can have pretty nice returns; especially if you can split utilities.

    After years in this business I’ve landed on either SFH’s or much larger unit counts (80-150 units) where the revenue stream/income statement speaks for itself and the asset can both obtain lending and you can find a strong network of passive investors to assist you in acquiring it.

    Good article and thanks for sharing!

  9. Insightful comments by all… the only thing I might add is that there are, at times, specific market constraints that might influence the choice. We live, buy and sell in Los Angeles – and we have rent control, which complicates owning anything larger than a single family. In CA (legally one of the most-tenant friendly states in the union), return on investment gets hampered when dealing with anything other than a single family because to try and raise rents – or relocate tenants – in duplexes, triplexes or quads gets nearly impossible, or, at best, very expensive ($10,000-$20,000 a tenant). So, while management is generally easier in multi-units, single family can end up being more lucrative here in LA.
    Just make sure you know state and local laws…
    Cheers…happy investing.

  10. HI Paula,

    I hope this note finds you well. I just listened to your podcast, I learned a great deal from it.
    I recently bought a investment piece at East Point, GA. I am looking to expand my portfolio in the GA area. Would appreciate the opportunity to talk shop with you.

    Take care. Have a productive week.

    Regards,

    Christine Virata, ARm

  11. Michelle Moore on

    I have a 17 unit and 18 single families. All are in a similar location, but the average tenant stay is much longer in the single families. Many of the single families have had the same tenant since they were purchased. None of the 17 units has the same tenant from when it was purchased. Tenant turnover leads to the cashflow being about the same per unit even though the multi-unit has lower maintenance costs per unit. At the time we purchased the multi-unit, the cost per unit was about half that of single families so it made sense. Now that we have been able to purchase single families at foreclosure prices approaching the per unit price of the multi-unit, it does not make as much sense.

  12. Mark Shaffar

    One thing I didn’t notice in your article was that in many markets its easier to refi cash out of an SFR than multifamily housing because there are more comps out there and the assessed value will be closer to what you paid. I know in Milwaukee the cash flow looks great on a duplex but you’re probably only getting 70% of your cash out vs 80% on an SFR

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