Multifamily vs. Single-Family Real Estate: Which is the Superior Investment?

by | BiggerPockets.com

There is an ongoing debate here on BiggerPockets and in real estate investing circles about which investment is better—single family or multifamily. It is a very interesting (and even fun!) debate, and both can be great investments if you are prepared and execute an effective strategy and plan.

Today, I am joined by fellow BiggerPockets contributor Chad Gallagher from Slatehouse Management Group. We go into a ton of detail as we debate back and forth on this topic. Chad presents an argument for why the single family home strategy is better, and I’ll be debating why multifamily is better.

Related: How to Transition From Single-Family to Multifamily Investing

Multifamily vs. Single-Family Real Estate: Which is the Superior Investment?

I hope you enjoy this in-depth debate. Let’s continue the discussion and debate.

What investment class do you invest in? Why is it a better investment?

Thanks as always for watching my videos!

About Author

Matt Faircloth

In 2005, Matt founded The DeRosa Group along with his wife, Elizabeth. At the time, the two person company owned and managed two assets – a single family home and a duplex. Over the last nine years, they have grown the company to a 12 person team owning and managing over five million dollars in residential and commercial assets throughout the central NJ and Philadelphia area.

One of DeRosa’s mantras is “to make money while making a difference.”

15 Comments

  1. Mike McKinzie

    Very much enjoyed the video. Currently owning 22 SFR and 1 duplex, I do have a unique perspective. The first thing I would also bring up is “Tenant Quality”. We know all tenants can be tough on rentals, but in my 40 years of experience, apartment dwellers are rougher on houses than SFR. And while vacancy on a SFR may be 2 months, that is 2 months out of 7 years, or about a 2% vacancy factor. Another huge difference is the price of the rents. Comparing a house that rents for $2,000 a month to a 50 unit complex that rents for $500 a door is vastly different, and both are different from a 100 unit complex that rents for $1,200 a door. An onsite manager and full time maintenance person cost the same for either complex, but as an expense percentage, it is vastly different. SFR is best for FIRST INVESTMENT as ease of entry is much greater. But if you are mainly wanting cash flow, the Multi Family is better. As has been said, WEALTH is created through appreciation and CASH FLOW/INCOME is created from rent. On a side note, both speakers need to slow down their talking speed a little, both need to look at the camera when they are talking and CARGO SHORTS? REALLY? I know we live in a more casual society, but at least wear some slacks and collared shirt! After all, we are talking Real Estate and not lemonade stands. But it was a very good expose on the pros and cons of both. If I may add one more thing, in my experience, when it comes time to sell, an SFR sells a lot faster than a multi unit complex, creating the ability to move faster on future deals.

    • Mike McKinzie

      I am one of those NAY SAYERS and have never had an LLC. And before this year, I had only seen 3 or 4 of my 25 investments (this year I went up to the Visalia, CA area to change Property Managers, for the FIFTH time in ten years, and saw my 10 rentals up there, which I had never seen before) So I am a little bit of a pariah, in that I am not ‘attached’ to my rentals, they are just business tools. This year is a tough one in that I will spend over 30% of my received rent on Capital Expenses alone. The 50% guideline is alive and well and I can empirically prove it. This year, I will top 60%, but that just evens out the 40% years.

  2. Cindy Larsen

    Matt and Chad,
    Awesome debate. I was impressed with your fairminded and generally unbiased approach.

    I haven’t done large multifamily yet, although that was my original intention when I started buying in 2018. In my market, large multifamily dals were scarce, and the ones on the market didn’t cash flow at current rents, resulting in low DSCR that made lenders unwilling to underwrite deals without substantial downpayments (40% or more down). Add to that the facr that interest rates are higher on multifamily, and I started looking for better options.

    While the market was also fiercely competitive for both SFH and small multifamily, I found that the numbers simply were better for small multifamily. A $300k 2 bed/1bath SFH would rent for $1400. Yet for $350k, a duplex with twice the sqft 2bed/1bath each side would rent for $1250 each side or $2500 total.

    After buying 16 units this year, I now have 18 units on 7 tax parcels: 7 duplexes and one 4 plex. 4 of my units (two tax parcels are owned outright. The other 5 properties all have 30 year fixed interest rates. The lowest interest rate is 3.75% on the property I bought in January (2 duplexes one tax parcel, owner occupied for a year). The highest interest rate is 5%, on the 4 plex I bought that closed in August.

    I am self managing all of my units. I have been able to force appreciation on my duplexes by cosmetic remodeling (5 units), increasing rents to maket, and rerenting to well qualified tenants. I am requiring tenants to pay all utilities, which is further forcing appreciation. My most dramatic increase so far is from $1080/month plus $75 utilities to $1400/month plus $125utilities + $35pet rent with the deposit going from $350 to $1400 plus nonrefundable pet fee of $400. My average rent increase per unit is over $200/unit per month on the units I have rerented (about 1/3 of them so far, with more in progress, and the most recent acquisitions that have leases extending until 6/30/2019)

    My biggest challenges have been:
    – inheriting less than desireable tenants, and managing those tenants until their leases expire.
    – finding qualified contractors for flooring, painting, plumbing and electrical, resulting in extended vacancies on recently acquired units due to waiting on contractors for cosmetic remodel. DIY is slow.
    – building a team to acquire properties (agent, home inspector, lender, home insurance)

    My take on the SFR vs large Multifamily debate is that the sweet spot is small multifamily. I am able to force appreciation. I get some economies of scale by virtue of owning a lot of units, so I can negotiate maintainence at large multifamily rates (e.g plumber for $125/hour vs $350/hour, gardening/yard maintenance at $17.50/hour, and tenants cut their own grass). My duplexes all have yards, so they attract tenants with families and/or pets who, I believe, will stay longer than apartment tenants. Tenants pay the utilities. Loans are 30 year fixed at attractive interest rates.

    Once all of my new acquisitions are fixed up and re-rented to qualified tenants, time spent on property management should diminish, and continuing to build my team to include more contractors I can trust to do good work should make next year a breeze compared to this year. I set all my new tenants expectations that rents will increase with the market, require them to autopay rent, and have set up communication mechanisms to insure that they report problems in a convenient (for both them and me) and timely manner. I also set their expectations that I will inspect the property periodically, and that it must be well maintained and clean.

    Obviously self managing small multifamily will not scale indefinately, but I don’t need hundreds of units: just enough to maintain financial independance.

  3. John Barnette

    Have several SFRs and an 8 unit. I manage it all. The 8 unit takes considerably more effort and time. Quality of tenants, chasing rents, repairs, tenant disputes with each other, turnover. But also yields substantial cash flow. And have had great appreciation via rent increases of about 25-30 % in last 18 months. SFRs. Easy to manage. Rarely here from the tenants, pay on time better, stay longer. Great market appreciation. And longer holds have had nice rental income increases. Cap expense looks to be more considerable for the sfr in the future though. At least with my portfolio. I like having the mix of both

  4. John Acheson

    If an investor/entrepreneur has high student loan balances and very low net income after write-offs,
    and they can’t qualify for residential financing, don’t they have a better chance at commercial financing,
    with a seasoned LLC that has established credit? Credit is almost free to build but few mention it, why?

    • Cindy Larsen

      When I looked into commercial loans, the lenders required a DSCR (debt service coverage ratio) of at least 1.25, based on documented past history of the propertys’ income and expenses. I found zero properties where that is the case when you are putting dow only 20% or 25&. In fact, the properties on the market would all have needed a downpayment of 40% to 50% to achieve the required DSCR. In addition, the lendres I talked to lenders wanted to see Reserves (money you have in the bank) to cover at least 6 months operating costs (all expenses including PITI, maintenance, capex, vacancy, etc). So, if you have a lot of cash, commercial loans may be feasible.

      I didn’t like the size of the downpayments required, or the higher interest rates.

  5. Rebecca Jackson

    In my limited experience, I like SFR. We have found tenants right away and they are solid and take good care of the home, because that’s really what it is. Psychologically there’s a big difference in living in an apartment building or multi family vs living in your own space. In my markets the ROI with multi family is comparable to SFR, and interestingly enough SFR rentals are in higher demand than apartments. However, I will add that commercial property provides flexibility to increase value with NOI, which doesn’t apply to multi family residential property…

    • Cindy Larsen

      I think SFR wins over small multi family as far as ease of exit strategy goes: It is simply easier to sell a SFH. The pool of buyers is far bigger, because it includes home buyers as well as investors. It is also easier to price and appraise a SFH using comps than it is to price an appraise a small multifamily. However the price is more or less at the whim of the market: those comps are really all that counts. So, in a rising market, the property will appreciate, and you can easily sell it at a more-or-less predictable price.

      But the SFH market will not care about how much you have improved NOI. Improvements that appraisers take into account are limited to things like adding bedrooms or bathrooms, adding sqft or having a new roof. Buyers are more likely to be impressed by the expensive new SS appliances, and the new laminate flooring, than they are by the fact that you increased rents or reduced expenses. They are making a personal and emotional decision, not a business one. Cosmetic rehabbing can force appreciation (by changing which properties yours is compared to) but you have to be carefull to not spend more on the finishes than you can get as a return.

      Exit strategy for small multifamily has a smaller pool of buyers: investors. So your property may be on the market for longer than a SFH. However, depending on the market cap rate, and the NOI, you have the opportunity to determine the sale price by forcing appreciation by changing the NOI through increasing rents, reducing expenses and making improvements. Investors will care that you put in durable tile floors, so future maintnance and turnover costs are reduced: and they will be able to see that decrease in expenses in your numbers. They are making a business decision. Also you could get a higher return than with a SFH because of forced appreciation added to market appreciation.

      Thats my take on it. I’d love to hear about large multifamily exit strategies and what strategies work to maximixe ROI.

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