Single Family vs Multi-Family Real Estate Investing

Investing in Real Estate is a great idea. You will diversify your investments away from the unwanted volatility of the stock market and create a sense of safety for yourself. Real estate provides a steady income stream and at the same time you are holding an asset that is appreciating in value. The next question is whether you should invest in a single-family or multi-family investment property.

Ultimately there is no wrong answer to this question. There are pros and cons to owing both single and multi-family investment properties and the only right answer depends upon the individual investor, the opportunity and their personal investing goals. Let’s take a closer look at both:

Single Family Properties:

By definition, a single-family property is one that houses one tenant or one family. Typically, this is a single house, but it could also be a single condo or apartment.

Easy to get started: Single family homes are by and large less expensive than multi-family buildings. Depending on your location you can find attractive single-family homes starting from $100,000 that you will be able to rent and make that steady income you are looking for. Most lenders will require 20% down (some even less) which means that to get started you only need a $20,000 down payment. You may want to renovate or at least clean and put on a fresh coat of paint, so it is advisable to get started with a little more than just the minimum down payment.

Greater liquidity: When you are ready you will find that single-family homes are easier sell just as they are easier to buy. Comparatively they have a lower price tag and therefore have lower barriers to entry. Your potential buyers come from a wider swath of society as well. Single-family homes appeal to both investors (like yourself) as well as traditional homebuyers.

Growing demand: According to U.S. Census estimates, the number of single-family rentals in the U.S. grew by 31% in the decade immediately following the housing crisis (2007 to 2016), while multifamily rentals grew by only 14%. Census data also shows us that Millennials are entering the age range when they can be expected to be starting families and this will drive demand for single family homes.

Additionally, credit-card debt, student loans and lagging wage levels across the country mean that there are many people who are looking for rental houses – as purchasing a house for themselves is out of reach (at least temporarily).

Diversification: As you grow your portfolio of investment real estate it is easier to diversify (geographically) with the purchase of single-family homes rather than multi-family homes. If one neighborhood experiences economic hardship – perhaps due to a large employer leaving – your other properties in other areas of the city (or country) will be able to pick up the slack. Now imagine if you had purchased a 10-unit building and the principle employer leaves the area? This is a much bigger blow to your finances than if you have 10 homes scattered around the country.

Traditionally low tenant turnover: Turnover costs money. You need to do a thorough cleaning, repair any damages, advertise and screen potential applicants not to mention the lack of income during the vacancy. Single-family homes generally attract longer-term, more stable tenants according to some reports. (https://www.marketwatch.com/story/the-new-housing-play-helping-priced-out-renters-become-long-distance-landlords-2018-07-30) On average a tenant will stay for 3-5 years in a single-family home which is nearly double the average for a multi-family. Many families are eager to set down roots and those with children in school are much less likely to move out.

Rarely mentioned but not to be discounted is the simple fact that with single-family rentals you will not have tenants squabbling amongst themselves as can sometimes happen in a multi-family rental. Of course, everyone has difficult tenants sometimes but with single-family rentals there will be no cross-tenant issues.

Multi-family Investment Properties:

By definition, a multi-family property is one that can house multiple tenants in different units. Think of an apartment or condo building with 10 units (or more). Even a triplex can be considered a multi-family investment property.

Higher monthly cash flow: When you have more tenants sending you rent checks you naturally have more cash flow. This doesn’t always mean you are more profitable, but you have more cash moving through the system.

There is also much less risk of achieving a zero-month cash flow. If you have a single-family rental house and the tenant moves out, you will have zero cash flow the following month. Whereas, if you have a 10-unit building and one tenant moves out you will still have 90% of your monthly cash flow that can be used to cover your expenses.

Scale faster: As you grow your real estate empire you will find that you can achieve scale much faster by acquiring multi-family property versus single-family rental units. With a 10-unit building you will have to only find one deal, one seller and have one mortgage. Imagine trying to acquire 10 more single-family homes. Potentially you have 10 deals to do your due diligence, 10 sellers to approach and possibly 10 different mortgages as well.

Economies of scale: Another benefit of investing in multi-family dwellings is that you can force appreciation much quicker. When you make repairs or additions to the common areas you are increasing the value of all the units. Much easier to fix one roof and add value to 10 units instead of having to fix 10 roofs to add value to 10 single-family rentals.

Professional management: When you have enough monthly cash flow you can afford to hire a professional management company to take care of a million little things. Usually paid a percentage of the rent, the professional property managers will find and screen tenants, collect rent, handle evictions, repair and maintain the property and more. This will leave you more free time to explore new real estate opportunities.

Easier to finance: Multi-family units are more expensive than single-family homes, but due to their higher monthly cash flow they can be easier to finance. This higher monthly cash flow, and the lowered risk of a vacant building, means that there is less risk for the lender. Because of this, there is much less risk of foreclosure on a multi-family building and therefore lenders are more willing to give favorable terms – despite the larger size of the mortgage itself.

House hacking: If you are just getting started in property investments then a multi-family unit has another advantage, namely you can live there too. This way you can avoid paying rent yourself (or the need to make another mortgage payment). It may also be easier to rent out the other units because many tenants like to know that the owner is right there with them to address any concerns they may have.

Conclusion: When it comes to making your decision about investment property there is no wrong answer. It all comes down to the details of the deal and your own personal circumstances and risk profile. Both single-family and multi-family properties have their advantages and disadvantages and you will need to consider them carefully before you pull the trigger on going all-in on an investment property.