Single Family Vs. Multifamily Rentals: Which Investment is Right for YOU?

by | BiggerPockets.com

Is it better to invest in single family or multifamily rental properties?

There are passionate advocates for both of these types of properties. How do they really stack up? What are pros and cons of each option?

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Investing in Single Family Rental Properties

Inventory

Single family rental property investors enjoy much greater inventory choices. There are around 5 million home sales in an average year. More choices mean the potential for finding better deals and doing a higher volume of transactions. This may not feel like the case in some areas—for example, San Francisco—but if you open up your map, you can find plenty of options with less competition, more value, and more volume potential.

Multiple Exit Strategies

Single family homes are popular investments for the fact that they offer multiple exit strategies. They have much larger resale pools. There are far more end buyers for single family homes than apartment buildings. Individual homes can be sold to retail home buyers (first time home buyers, move up buyers, and those downsizing), rehabbers, other buy and hold investors, builders, to cash buyers, or on a seller financed basis.

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Related: Should You Invest in a Small or Mid-Sized Multifamily Deal? Get the Pros & Cons Here!

Ease in Getting Started

This is a cheaper option, too. The average single family home is far cheaper than an apartment building. That can be attractive to those that want to pay all cash. It can also appear easier for those that have little money to put down. If you don’t have the money to buy a whole house yourself, you can even partner with others.

Investing in Multifamily Rental Properties

Scale

For those with really big goals, multifamily property investing can help make some big leaps. Imagine if each acquisition added 10, 20, or 100+ new units to your portfolio instead of just one. Anything over 5 units is consider commercial multifamily. One to four-unit properties are treated as residential for financing purposes.

Efficiency

It takes less time and energy to acquire 50 units in an apartment building than 50 single family homes. It may take a little longer and a little more work than one single family, but it does build in more efficiency and better ROI on your time. Investing is all about being efficient with your time and money. At some point, most investors will find that it only makes sense to graduate up to multifamily to fully optimize their cash, wealth building, and lives.

ROI

One of the best benefits of multifamily property investing is the economy of scale. That means you can do more for less. Apartment buildings typically have a lower cost per door, management is typically more effective and profitable, and any improvements made can help to lift the value of many units, not just one. For example, if you put in a pool, you are adding the value of a swimming pool to every unit in the community.

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Related: 4 Ways Technology is Shaking Up Commercial Real Estate (& Why Multifamily Will Pull Ahead)

Control

Multifamily property investors also enjoy more control over their income and asset values. Commercial properties like this are valued on their net income, not comparable sales. Landlords have the freedom to not only adjust rents, but to increase operational efficiency and augment income with factors such as laundry, internet service, and more. You can reposition an apartment building in many ways that are beyond the possibilities available to single family home investors.

Summary

Overall, I like both of these types of real estate investment because of the options above. I don’t think it has to be an either/or choice. Single family homes and apartments have their advantages. It really just comes down to what makes sense to you as an investor.

Investors: What’s your preference, single or multifamily? Why?

Leave your comments below!

About Author

Sterling White

Sterling White started in the real estate industry at a early age back in 2009. The company he co-founded Holdfolio is a real estate crowdfunding platform based in the Indianapolis market. Before founding Holdfolio Sterling and partner Jacob Blackett were involved in the purchasing and selling of 100+ single family homes nationwide. In his free-time he trains for a World Record.

14 Comments

  1. Curt Smith

    tnx Sterling, from the perspective of having bought both and continue to look for both I can say this:

    – Commercial has its theoretical advantages on paper

    – If you are in real estate to make money, the kind you can spend after taxes etc then I think there’s a winner in most markets.

    – Deal flow is drastically different between these asset classes, comparing on dollars deployed basis.

    We’ve bought 37 SFRs in 6 yrs and 1 mobile home park (1.1M). Since buying the park I’ve bought 6 SFRs netting around $3.5k/mo additional income, exactly what the park nets per month. We have continued to look for more deals, none.

    I see folks getting lost in the forest for the trees situations comparing things without an important criteria, which is easiest to manage and which has the higher deal flow which makes more money in your pocket. Deal flow (and cap rate) are 2 of the most important criteria yet folks only talk about one, cap rate.

    In 2 yrs, I bought 14 or so SFRs and 1 mobile home park. So I added double to my spendable income with SFRs than commercial. My peers who are going after hotels, MHP, MF, self storage are adding half or much less than half per year of what I can do buying SFRs. Actually I rarely hear of a MF deal closing in my group…

    I’m not saying MF or commercial is no good, just saying that my first hand experience comparing the 2 and being in an active REIA with other commercial (questers) finds commercial deals difficult to find and close. Then once closed are more challenging to manage than SFRs.

    Since cap rates are ridiculously low in every commercial deal type I’ve seen, very low deal flow,, I’ve lost my interest and now only buy SFRs.

    Since I quit my day job based on rapidly increasing my passive income in 6 yrs, if I was focusing on MF I;d still be working the day job.

    Ok ok I read and hear on blogs folks who are killing it in MF. Sure sure. I know that for me and the folks around me in Atlanta and the SE I know for an hours time spent marketing you’ll buy more SFRs.

  2. Jeff Kehl

    Great article Sterling, a very balanced look at it. I agree completely with Curt Smith. I look at both and buy both but I absolutely refuse to chase multifamily at crazy prices. I lost out on a 32 unit early this year because another investor paid list price which was essentially a 6 cap. Mean time I have bought 20 units consisting of an 8-plex, a 4 -plex, 3 duplexes, 1 house and a commercial office and I got good pricing in the 8-10 cap range for all of them.

    Sure it is more work for me to close all of those properties and they are a short distance from each other. But operationally they will be fairly similar to run as the set of apartments. So to my way of thinking the question is whether I and my team are willing to do a bit more work for much more profitable properties.

    And I also feel like I have more options on the back end. If I feel like owner financing the single family home I can do that. You can’t do that with one apartment unit.

  3. Rich E.

    Good article. I would just add, that in my experience, SFR are somewhat easier to manage. Tenants are less transient and take care of the snow removal, cutting the yard, landscaping, etc. and you don’t deal with neighbor issues (too loud, took my parking space, etc.). The downside is that you have more capex with multiple roofs, driveways, etc. and lose the economies of scale. All being equal, I would prefer SFR for the benefits you described above but, in my area, it is hard to find any that cash flow with the improved economy because you are competing with home buyers.

  4. Rob Saunders

    Good discussion. Another consideration is location; we have found that the right 2, 3 or 4 unit properties in the right locations not only bring higher returns but can actually follow the appreciation curve of the SFR market. Another thought along the lines of what Curt mentions; we think about the number of roofs we have to maintain and insure; a single physical building with multiple income streams can be cheaper to maintain than the equivalent number of separate SFRs.

    Ultimately it is like all other investing; have a balanced portfolio and educate yourself on which works best for you in the long run.

  5. Very nice article…We have started investing in SFR and so far no issues. To all the investors who posted comment above, how do you rapidly increase your portfolio so quickly. Do u all pay cash or finance? Also, what price range do you target?
    Thanks..

  6. Dan Heuschele

    I think you did not address thoroughly enough the difference in financing options. MF will require commercial loans which typically are shorter duration (if fixed rate) and higher interest than SFR loans.

    Besides that one item I think you covered the subject quickly (short artical) and thoroughly.

  7. Tyler Shigenaga

    Can someone leave a post with the pros and cons of the financing SFR vs MF? Sterling mentioned the commercial loans for 5+ units but can someone expand on that topic? I’m sure much of this has to do with the investment strategy but it would be good to hear from experience.

  8. andy much

    I agree with you Holly generally for the NE area. SFR median price in my neighbourhood is about $270-$340K for about a 3 br.
    Drive 40 mins away and you could get 3 unit for about $300K. Granted, there is a disparity in neighbourhood quality but they do cashflow if you do the numbers right!

  9. You make a really good point that single family homes have a much bigger resale pool than apartment buildings do. My husband and I are thinking of investing in property to rent out. Since we live in a college town, it would probably be easy to resell a small home if we ever needed to.

  10. edward wodziak

    In the suburbs of Chicago area MF are just too high of price where they don’t cut 1% rule and they you got to pay for all or some of the utilities and maintenance fee. Where here it is easier to find SFH that make the 1% rule and the tenant covers all the utilities and maintenance. I just cant find any MF in the my area (unless I am willing to go to the D area of Chicago and expect high turnovers)

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