Good news! They are both great investments. As long as the numbers on a property work, and as long as you are educated in terms of your buying criteria and the risk level you are taking on, both single-family homes and multi-family homes are great to add to your rental property portfolio.
But if you are only trying to buy one property right now, which one should you go for? If you are buying your very first rental property, which one should you start out with?
How about an easy breakdown of the pros and cons of each to help you decide? But first, let me clarify some terms.
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There are a few terms you need to understand when thinking about single-family homes and multi-family homes and differentiating between them for investment purposes.
First, know the acronyms that you will see used for both.
- Single-Family: Typically you will see the acronyms SFR (single-family residence) or SFH (single-family home). Either one is fine. I will use SFR in this article for no reason in particular; I just like it better.
- Multi-Family: Following the same pattern, you will typically see either MFR (multi-family residence) or MFH (multi-family house) for these. To follow suit with my choice of SFR, I will also use MFR for this article.
Now that I can type a lot faster because I can use acronyms instead of full words, let me explain another differentiation.
- Residential: Residential properties refer to places in which people live.
- Commercial: Commercial properties are ones that cater to businesses or organizations.
Unfortunately, these two terms start intertwining pretty quickly, so here comes yet another distinction.
- Residential SFR: Residential property with only one unit. Meaning — like your typical house, rather than a duplex, triplex, etc. One unit means technically one set of people living there (set can mean a single person, a family, roommates, etc.)
- Residential MFR: Residential property with either 2 units, 3 units, or 4 units. So that would be 2, 3, or 4 separate units, meaning 2, 3, or 4 sets of people living there.
- Commercial MFR: This is a residential property containing more than 4 units. See where it’s a little confusing now? It’s still residential units, but it falls under the commercial umbrella. Commercial buildings, as stated above, more often deal with office or business spaces, but in this case it is still referring to residential properties. I guess because the assumption is that anyone buying this size of property plans to run it like a business? I have no idea. Either way, apartments for example fall into this category.
The primary time the residential vs. commercial terms come into play is when you are talking about financing. Residential loans are very different from commercial loans, so that can play a major factor in deciding which route to go.
Work backwards with me a little now, starting from scratch. You want to buy a rental property and you have to decide what kind to buy. Assuming you are buying a residential property (tenants renting a living space and not an office space), you can decide between an SFR and an MFR. But if you want to go the MFR route, then you have to decide if you want a “residential MFR” or a “commercial MFR,” meaning a building with 1-4 units or a building with more than 4 units. Commercial properties operate differently in terms of financing and other factors, so for this article I’m going to stick with residential MFRs only. However, the pros and cons of MFRs do pertain a lot to commercial MFRs as well, so you can use that in your considerations.
Pros and Cons of SFRs and MFRs
As with just about anything in real estate, or in life, there are pros and cons to both sides. I want to again preface this pros and cons list by saying that these things only matter assuming the property itself is a good deal — the numbers suggest positive cash flow, it fits educated buying criteria, and proper teams and experience are in place to manage the property.
If all of those things are intact, and now you have the choice between a SFR and an MFR, this list can come into play to help you decide which one to buy. Or use it to determine if you want an SFR or an MFR first, and then determine where the other factors (cash flow, etc.) fit.
Here we go! Pink stars refer to “pro.”
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 referring to units) you get.
This one only matters if you are taking out mortgages on your rental property. Banks limit the number of mortgages you can have — typically at 10 if you have really good qualifications, but oftentimes less than 10. If you are only buying SFRs, this will max you out at 10 properties.
But what if you buy 10 4-unit MFRs? Then you end up with 40 units! Huge difference there, and again dependent on your financing ability, but no one can contest that you can buy more “doors” using mortgages if you buy only MFRs.
Because of the shared walls, the shared yard, and whatever else the units in an MFR share, maintenance expenses are often reduced because more similar amounts of material and labor can cover more units at once. One example would be plumbing. Basic plumbing issues may be individual to the units (like clogged toilets), but what about the internal plumbing?
Let’s say one person has 4 SFRs and another person has one 4-unit MFR. If the person with the SFRs has to replace the internal plumbing on all the properties, that will be four completely separate plumbing jobs. If the person with the 4-unit MFR has to replace the internal plumbing, that will be only one (bigger) plumbing job. So that person ends up with essentially four plumbing jobs done way cheaper than the person who has to pay for four plumbing jobs all separately.
Using the same example of the 4-unit properties (4 SFRs or one 4-unit MFR), you either have four properties to manage or one property to manage. Granted, the 4-unit MFR will be more intensive to manage because it will have more tenants calling in with maintenance calls and more in the paperwork since it includes four units, but it is still only one building and one address.
It would be easier to manage the one building, or hire a property manager for the one building, and shuffle all the paperwork than it would be to scurry around to four separate buildings with four separate addresses. This includes taxes, for example — file four separate properties on your tax return, or file one property on your tax return. So the MFR is better for ease of management.
One of the best benefits (next to the financing) to owning an MFR over an SFR is vacancies. Why? Because if one unit in an MFR goes vacant, you are still receiving income from the other units (presumably) so you aren’t at a total loss for income. This is especially helpful if you are paying mortgage payments each month. 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.
But if you have an MFR, the income from the non-vacant units can often cover that mortgage so it doesn’t have to come out of your pocket. There is a way to have this same benefit with SFRs, however, which is to own more than one. If you own 4 SFRs, the income from the other three can make up for no income due to vacancy in one of the properties. But for simplifying for the idea of buying one property, MFRs make more sense for making up for vacancy expenses.
Most often the returns on MFRs will show higher than SFRs. It depends on the location in which you are looking and assumes you are looking at good deals, but usually the returns will be higher on MFRs. It is really a trade-off for some of the downsides to MFRs, and those returns can differ in reality from what is originally projected due to those downsides, but cash flow is often higher on MFRs.
Not always, but usually, SFRs will be in more desirable locations than MFRs. Think suburban vs. urban if you want a more dramatic picture. Think of subdivisions containing only SFRs vs. areas of only MFRs. Better areas often mean better safety, better appreciation, higher-quality tenants, and fewer headaches. SFRs take the cake on this one.
This one isn’t a guaranteed factor of either SFRs or MFRs, but there is a better chance of having better quality of tenants in SFRs than MFRs. Again, this is completely dependent on location and quality of property, but typically SFRs attract longer-term tenants who are looking for a home to feel like their own. Versus MFRs, which few people see as their own (unless it’s a nice condo, but a nice condo will doubtfully cash flow for an owner). Typically, it is a higher-quality of tenant looking for somewhere to view as their own and take care of, and once they are in and seeing the house as their own, they are likely to take better care of it.
MFRs typically attract more transient tenants who likely won’t stay as long and are less interested in treating the property as if it is their own. Tenant quality goes a long way when it comes to owning a rental property (repairs, vacancies, headaches…) and can dramatically affect the anticipated returns on a property. It is possible to have perfectly good high-quality long-term tenants in an MFR, but the chances are better with an SFR. Just the same, it is easily possible to end up with horrible tenants in an SFR. It’s all about risk factor and just at looking at the chances of good or bad tenants — SFRs win out on this one.
As just mentioned, MFRs tend to attract more transient tenants rather than long-term tenants. This may not seem like a big thing, but tenant turnover is arguably the biggest expense to a rental property owner. Expenses include lost income from no one in the property from one to a few months, repairs to the house in preparation for new tenants, tenant placement (if paying a property manager), and legal fees if the turnover is due to an eviction.
The best thing that can ever happen to a rental property owner is to find good quality tenants who stay for a long time. Long-term tenants are gold for an investor. As soon as you are replacing tenants every year or two, your expenses can jump pretty heavily. Same as with tenant quality, it is not a sure thing that SFRs will bring in only long-term tenants and MFRs will only bring in transient tenants, but it falls onto a scale of risk.
If you are looking for appreciation in your rental property, SFRs will almost always appreciate more than MFRs. MFRs are typically better for cash flow, and SFRs are typically better for appreciation. Not much else to tell you on that one.
This is a term not as common to newer investors as it should be. Exit strategy refers to your end game. What are you ultimately planning to do with this rental property you are buying? Maybe you don’t know exactly what you plan to do with it for certain (totally reasonable to not predict the future), but what will you be able to do with it should you need to do something?
For instance, let’s say you decide for whatever reason you need to sell the property. Who will/can you sell it to? SFRs win out on this one because you have multiple options for selling it. You can sell it to someone looking to buy a primary home of their own, you can sell it to an investor who wants to make it a rental property just like you did, or if you want to get really creative, you can lease-to-own it to your current tenants and let them buy it from you. You have several options.
Whereas with an MFR, typically the only people interested in buying MFRs are investors. And what do investors always want? A deal. You doubtfully will 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 who you can sell it to (larger pool).
So What’s the Verdict?
The verdict is there are pros and cons to both SFRs and MFRs as (residential) rental property investments. The good news is, as stated before, both are great investments. In my opinion the cons for each aren’t horribly bad. SFRs definitely have perks over MFRs, but just the same, MFRs have perks over SFRs. The key term to think of here is “trade-off.”
In any investment, there will always be trade-offs. MFRs may give you better cash flow, but that higher cash flow only just makes up for the potential location and tenant risks and potential lack of appreciation and exit strategy. You typically get higher quality with SFRs, but you’re going to take a hit to the cash flow. And the one thing I can’t say enough is that none of the factors mentioned, or the pros and cons, are guarantees with either. Look at them more like trends to help you assess risk factor.
Ultimately, which type of property you decide to buy needs to be based on your comfort level. If you are a really 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 great. Have some of both so you spread the benefit and risks more.
For you experienced investors, what’s your preference for buying rental properties? SFR or MFR? Why? I’d also love to hear from flippers—which do you usually buy and flip?
Leave me a comment below, and let’s discuss!