Single Family vs. Multifamily: Which is the Better Investment?

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I get asked a lot, “Hey Michael, I’m interested in cash flow real estate investments. What’s better: single family rentals or multifamily properties?”

It’s difficult to answer this question definitively, but I’ll present the pros and cons for each and you can make your own decision.

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Single Family House (SFH) Rentals

Pros

They can yield higher cash flow.

Even in times like these, as commercial real estate is heating up and it’s more difficult to find good deals, investors who have SFH rentals are making killer returns, with cash on cash returns of 20% and more.

This is true even in hot markets like San Francisco or Washington, DC. That’s because you can acquire townhouses or single family houses for a relatively good price, but rent them out such that, after all expenses, you can net $400 – $600 per month.

Related: Multifamily Landlords Are More Experienced Than Single Family Landlords

They’re more affordable.

Buying SFHs is much more affordable than buying apartment buildings. Many people have the cash themselves to slowly accumulate SFH properties over time.

They’re great for slow but steady growth.

This makes SFH investments perfect for the individual who wants to use his own financial resources to buy, say, one house per year, every year. If you can buy one rental per year for 10 years, it could set you up very nicely for an early retirement.

Cons

They’re difficult to scale quickly.

Let’s say your goal is to acquire 20 rentals in a year. To achieve that goal, you’d have to find and buy 20 houses. Regardless of how good you are, that’s going to take a ton of work.

Therefore, the SFH rental strategy becomes highly transactional: for each “unit” you want to add to your portfolio, you’ll have to buy one house.

They’re harder and more expensive to manage.

A professional property management company will usually charge around 10% of the collected rent to manage a single family rental. Compare that with 4% – 7% for apartment buildings.

Because of the increased expense, many landlords manage their own rentals, at least until they reach a certain size. If you don’t want to manage your own houses, then SFH investing may not be for you.

They’re more difficult to sell.

Compared to selling 50 apartment building units all under one roof, selling a similar portfolio of SFH rentals is much more difficult for two reasons:

(1) It takes a certain buyer to buy a portfolio of SFHs, which means the buyer pool is going to be smaller and (2) it is likely going to be more difficult to find financing for such a portfolio. Alternatively, you’d have to sell off each property separately, which will take time.

Their values are market-dependent.

The values of SFH rentals are driven by other residential sales comparables. The income normally doesn’t factor into the price of SFH rentals.

This means that the value of your portfolio is tied to the residential real estate market in general, which could be good or bad. But either way, it’s very difficult for you to influence the value of your SFH rentals because the market, not its income, will dictate its value.

Their vacancy equates to a 100% economic loss.

If one of your rental houses is vacant, then you have a total economic loss during the time of the vacancy. Unless you can offset the loss from other income, this can become a real problem.

Multifamily Apartment Building Properties

Pros

They allow you to scale more quickly.

Back to our original example with SFHs: Let’s say you want to acquire 20 units in the next 12 months.

With SFH rentals you’d have to find and buy 20 individual houses — 20 separate transactions. With multifamily investments, you could get 20 units just by buying one building, in just one transaction. Multifamilies give you the opportunity to scale more quickly which gives you economies of scale.

They’re easier and cheaper to manage.

The nice thing about multifamily apartment buildings is that “normally” the cost of a professional management company is built into the business model. Professional managers will generally do a better job than you can. And it allows you to be more hands-off, so that you can spend your time finding other deals or doing whatever it is you want to do.

If you’re looking for a more passive kind of investment, professionally-managed commercial property is the way to go.

You have more control over value.

Commercial real estate is as not as dependent on comparable sales as SFH rentals. That’s because it’s normally valued as a multiple of income. The higher the income, the higher the value. It’s therefore possible for you to pay “fair market value” for a mis-managed property, make renovations, increase the rents and decrease the expenses.

Within 2-5 years, you’ve increased the overall income and with that, the value of the property. Frequently, even a $50 per month per unit increase in operating income can increase the value of the building by several hundred thousand dollars. This means you have much more control over the value of your real estate.

There’s more upside.

Because you’re acquiring more units quicker than with a SFH strategy and you can create so much additional value by optimizing the performance of your property, the upside of apartment buildings can be significantly higher than with SFHs.

Cons

They’re more expensive to buy.

Unless you’re buying smaller properties, apartment buildings normally will cost more because, well, they’re bigger and more expensive to buy than a single family house. This seemingly puts apartment buildings out of reach of most investors. I say “seemingly” because some investors are of the impression that they can only use their own money or credit to invest with.

However, the solution to this problem is to raise money from other people. Even if it takes you a whole year to raise $500,000 to buy your first apartment building, it will still accelerate your real estate investing career.

I’ve written extensively on TheBiggerPockets on raising money — if this is of interest to you, see these related articles:

Nevertheless, you normally need more capital to purchase apartment buildings, so that’s still a disadvantage compared to SFH rentals.

Related: The Pros and Cons of Single Family Rental Properties

It’s harder to find good deals right now.

It’s true: it’s darn hard to find good apartment building deals right now — all across the country. A lot of commercial real estate investors are being patient with their buying. Some have changed their strategy to SFH rentals because of these challenges.

Conclusion

SFH rentals are a good strategy because they’re easier to find and self-fund. But if you want to scale up and are looking for a more leveraged use of your time, then raising money to buy multifamily apartment buildings is the way to go.

Is it harder? Sure. But is it more worth while in the long run? Absolutely.

What do you think is better? Single Family House Rentals or Commercial Properties?

Leave a comment!

About Author

Michael Blank

Michael Blank’s passion is being an entrepreneur and helping others become (better) entrepreneurs. His focus is buying apartment buildings by raising money from private individuals. He’s been investing in residential and multifamily real estate since 2005. He is the creator of the Syndicated Deal Analyzer and the eBook "The Secret to Raising Money to Buy Your First Apartment Building".

29 Comments

  1. Hey Michael,

    Great post. I just wrote one similar on my site with the conclusion that multi-family is best.

    Many of the reasons you already answered, but there’s one in particular that I love. With multi-family the investor(s) can control the asset’s value. We buy under-performing apartments, increase value, and then cash-out refinance the equity gain. We use that cash (as debt) to purchase another multi-family deal and repeat the process. It’s much easier to regain your investment with commercial lenders without having to sell.

    Multi-family has the greatest potential to make millions.

    Here’s a few other reasons why I love multi-family:

    -Credit score does not matter with non-recourse financing. Non-recourse means the investor is not personally liable for the loan. The asset is.

    -Economies of scale is a big one. Most of your tenants are densely populated in one place, as opposed to single-family. Repairs are much less expensive, and with larger apartments the investor can hire expert property managers, maintenance crews, landscapers, etc.

    -Tho job of a multi-family investor is to deal with the managers, not the tenants.

  2. Scott Trench

    Michael,

    Thanks for this article. As an investor getting started, I’ve gone down the multifamily route by buying an owner-occupied duplex. I think this is a great way to scale relatively quickly, but still go through traditional financing platforms. I think this strategy allows me to benefit from some of the Pros you point out, but also to negate some of those cons.

    -Scott

  3. The argument about SFH being a 100% loss during vacancy doesn’t hold up. If I have 20 SFH’s and one is vacant I have a 5% vacancy rate. That is the same as if I had a 20 unit apartment building with one apartment vacant, still a 5% rate. The fact that one building is 100% vacant is irrelevant.

    I own both and enjoy both. For most of us it is impractical and unwise to start with apartments. But they do accelerate growth once we have some experience under our belt and want to grow faster. Great article!

  4. Frankie Woods

    Mike, great article! I would add that the decision to buy one vs. the other will depend greatly on your market and personal goals. Even though I believe, for me personally, multi-families are the way to go, the price could be prohibitive in some markets where they are hot. In those cases, the “deals” might “not exist” to the average investor. However, if you are really good, you can find deals regardless of the market cycle. I’m just not there yet :(.

  5. Colin Murphy

    Very nice article Michael, I think you hit the nail on the head with those pros and cons. For people that are ambitious, I think multi family is a much quicker way of building real estate wealth. For those who are part time investors (i.e. with full time jobs), then acquiring single families bit by bit is probably a safer way to build up a portfolio over time.

    You´re right that selling a multi family portfolio is probably easily than selling a single family portfolio, but of course, if I had 10 single families and decided to offload 3 or 4 of them to local buyers over the course of a few months, then that´s a very viable strategy and not available to commercial investors.

  6. Jim Lally

    Really enjoyed your article! Personally I feel the MF acquisition approach is the way to go because of the vacancy issue. Negative cash flow is never good! One other aspect of the SF vs MF argument is the pool of potential tenants. A SF is of course more geared towards a family or group of people which tends to narrow the potential number of tenants. On the other hand a MF could appeal to both groups and individuals (depending on # of BR, sq. ft, etc). There’s no question that having your own place vice sharing with other tenants is appealing from a tenant’s perspective though.

    However, from an investors’ perspective you also have to look at the current trends in the market from a macro level. There is currently a slow steady migration from the suburbs to urban areas which will further enhance MF/Apartment housing demand. This of course is dependent on location but I feel this is where we’re heading.

  7. Hi Michael:

    Thanks for the article. There are a few points that were missed. It is apparent that you lean towards MF, and that is not a surprise as surely more money can be made there with millions to invest.

    However SFH have the following advantages that were not mentioned:

    – tenants of a SFH pay all utilities. This can be huge. In Minnesota, I sometimes drive buy a MF and see a window open in January. The tenant is too hot, and it is easier to open the window that call mgmt to fix the HVAC system! Since the tenant is not paying for heat, it works for him!

    – if there is a catastrophic issue at a typical 11 unit MF, many tenants and therefore alot of rent is gone for awhile. For example, the top floor leaves the water running over a weekend, and all units below are flooded. With 11 single-family homes, only one tenant needs to move out for awhile. The other 10 tenants keep on paying rent.

    – In general, tenants cant wait until the day when they move out of a MF unit. Otoh, tenants want to stay in a SFH. Its great to have happy tenants as opposed to those dreaming of leaving.

    – There are specialty SFH properties that can be exceptional. For example, Vacation rentals are a SFH market that sometimes have the capability of generating income equal to a moderate MF building.

    – MF cap rates are limited in metro markets to 5 or 6 or 7% cap rates at purchase time. Otoh, SFH can enjoy cap rates of 8% to 12% cap rates at purchase.

    – Major expenses in MF units are significant and all-at-once. For example, a rubber roof replacement on an 11 unit MF can cost $50k, and so can the furnace. And it all needs to be done at one time. Otoh, 11 SFH will have lower costs of each furnace replacement (maybe $3k for unit) and they only need replacement one-at-a-time – so the cash required in any one particular year should be less. Especially the years immediately after purchase when savings for major expenses are not yet accrued.

    – MF repairs and mods are more closely watched by the local gov. Permits for everything, ADA rules, etc. SFH are much less scrutinized by the gov, especially older units built pre-1980 where so much is grandfathered past the current building codes.

    Joel

  8. Carole G.

    I own several SFH and several MF. I like them each for different reasons, and like having a mix. We manage all of these ourselves, and the MF are definitely more work to manage, as they are a lower income level than the SFHs. I get, on the average, more cashflow/door in the SFH than the MF. And the prices of SFH vs. MF just depends on where you buy.

  9. Apartment buildings win hands down in my book. My wife and I began our Real Estate investing career by first seeking out SFR’s at/near the bottom of the market and just couldn’t make sense out of the numbers (granted we were looking in one of the nations most competitive markets). Then one day after going to an open house for a SFR the listing agent asked me a question that I knew you should NEVER answer: “How much do you think this property is worth?” I responded (to the dismay of my wife) with a very low number, shook his hand and we left. On the way back to the car my wife asked me out of frustration and anger: “What on earth were you thinking?!?! You know you’re not supposed to…” I stopped her and said “I’m done wasting our time on SFR’s”. Little did she know that while she was processing through the hundreds of SFR listings, that I was looking into apartment buildings and found the numbers to be, well, AWESOME! to the point where I asked myself two questions: 1) why didn’t anyone ever tell me about these? and 2) why are we wasting our time looking for SFR deals?. Not too long after that infamous day at the open house we finally found our first major deal and have been bringing in the cash-flow ever since. Neither of us regretted going that route and have since turned our focus to only searching for MFR’s and have accumulated a number of buildings.

  10. Mehran K.

    Great article Michael, will likely be linking people to it quite often 🙂 I Can’t tell you how frequently I get asked this question!

    Regarding having more control of the value of the M/F buildings, don’t CAP rates also fluctuate based on investor interest in a particular market? I have yet to invest in an apartment building yet, but I often hear about the wonders of forced appreciation and I think it’s a beautiful thing. However, my cautious mind wonders about the possibility of buying a building in a market when the going cap rate is say 8%, dumping money into it and, but when you you’re looking to cash out, somethings happened and the going cap is now higher.

    I’m not sure if this fluctuation is as dramatic as it is in the residential housing market, that’s why I ask.
    What are some things you consider to mitigate this risk? Do these fluctuations happen very slowly? Do you time your rehab/overhaul of the property as fast as you can to avoid this? Has this happened to you before? It’s just something I don’t hear much about and I’m curious to understand a bit more. I’d appreciate it if you can drop the wisdom 🙂 Thanks in advance!

    • Michael Blank

      Here are my thoughts on this, but others please jump in. CAP rates can definitely fluctuate. For example, they tend to go up as interest rates rise and can go down as demand increases. If interest rates were to go up but demand goes up, cap rates may stay unchanged. A lot of this is speculation of course. For my underwriting, assuming I have a 5 year time horizon, I may add 0.5% to my current cap rate to be a bit more on the conservative side.

  11. William Randolph

    Thanks for the Article. I have been listening to your podcasts and am still stuck on the “good deal” determination for MFs. On SFR the cash flow, appreciation, tax benefit/depreciation equation sounds logical and it can be rather easily determined, but what about an apartment building? A MF that has a reasonable vacancy rate of 5%, market average rents and is cash flowing, with logical expense rations? If the asking price is based on the math of the NOI and CAP rate –what makes that a good or not good deal? That math seems alot harder to determine on MF’s. Thanks again…

  12. Robert Steele on

    One thing that you don’t take into account is quality of tenant.

    In my experience SFH tenants tend to be of better quality than apartment tenants. They tend to stay longer and pay on time more often. Maybe that is just a factor of rents and tenant income. SFH tend to rent for more so attract tenants who are more financially responsible. Of course this is not exclusively the case when comparing cheap cheap SFH with high end apartment complexes.

  13. Dan Heuschele

    I have SFR and some small MFRs (attached and detached) and I find that detached MFRs are ideal because it offers much of the best of both scenarios. I find tenants stay in detached units longer than in attached units. People want homes and think of apartments/attached units as a necessity due to finances. Once they are in detached units they are in homes even if the property has multiple detached units. With detached units there are less neighbor conflicts, less pest migration, less parking/yard issues, etc.

    One purchase of detached units gets multiple units typically cheaper than buying the same number of equivalent SFR. For example a property with 4 detached homes typically sells for much less than 4*(equivalent SFR price) but each unit rents for virtually the same the rent on the SFR.

  14. I really like how you explained that multifamily apartments you can bring in more cash flow. Maintenance might be a little trickier, but if you have good tenants that take good care of it; it will benefit you in the long run with higher income. I own a couple properties I rent out and I have been thinking about renting them to multi families because I have basements in them that I can install kitchens down there as well. Would you just charge twice the rent than before to multifamily rentals?

  15. Josh Justiniano

    I think as a young person multifamily has to be the way to go… SFH investing is hard to create a ton of cash flow quickly. And the logistics of multifamily make more sense.

    I understand the appeal of SFH, but over the long run a well run multifamily operation will outpace and beat a SFH rental business.

  16. I like the idea of having a single family home to bring in higher income when it is occupied. I would like to know who I’m renting to and build a relationship there. I don’t mind so much if it has to be vacant for a while when people move so long as I know and trust the people that rent from me. Great tips!

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