Investing in Single-Family vs. Multi-family Properties

Share:

Seasoned real estate investors know when it comes to investing in single-family rental (SFR) or multifamily rental (MFR) homes that each type of property comes with its own set of pros and cons.

Single-family homes are generally freestanding residences designed to accommodate one family on a parcel of land and with one set of utilities.

Multifamily homes are intended to accommodate more than one family living independently from one another, although they may share walls, common areas, garages, or outdoor spaces. 

Single-family rental homes can be relatively easy to buy and hold, offer flexibility, and generally have lower associated costs, but SFRs typically produce less income than multi-family homes and pose a financial risk if you find yourself without a tenant for any length of time. 

Multifamily homes may provide multiple revenue streams and generate higher income, but MFRs also have higher costs associated with building maintenance and management. 

Many MFRs are co-owned by an investment syndicate —  meaning a collection of investors — and profits are shared amongst the co-owners. While this can reduce the risk for an investor, it also means you have less individual control over the property.

Which type of property is the most beneficial investment opportunity for you will depend on multiple factors including your financial goals, budget, and market conditions.

For example, if it is a buyer’s market or a seller’s market.

Single Family vs Multi Family InvestingAdvantages of Single-Family Rentals

Less Expensive to Start

A key advantage of single-family properties is that because they’re typically less expensive than MFRs, they require less of a cash investment up front.

Conventional lenders traditionally require a 20% down payment for a standard residential real estate loan, but a multifamily property with four or more units will likely require an investor to finance the purchase through a commercial lender, which typically requires a down payment between 25% and 30%.

A $100,000 SFR would require about $20,000 for a down payment, while a $1 million multifamily property, for example, would require $250,000 or more.

Of course, a larger property loan equates to a larger monthly mortgage payment as well, making MFRs cost-prohibitive for some investors. 

Easy to Sell

Because single-family homes are relatively easy to buy, that means they’re usually easy to sell when the time comes to exit your investment. The buyer’s pool for SFRs is larger because it includes traditional buyers as well as potential investors.

Selling a multifamily property requires a more carefully planned strategy and can take longer to execute. 

If it’s a vacation rental property it is likely to be in a high demand area.

Low Tenant Turnover

Single-family rental homes typically see lower tenant turnover than multifamily properties, with the average tenant renting for three or more years.

Many SFR tenants have families with children and are looking to put down roots in a particular neighborhood or are attracted to the school district. It makes sense that SFR tenants looking for long-term stability are more likely to treat the property as their own. 

That said, realize that replacing tenants when they do move on involves maintenance like cleaning and repairs due to normal wear and tear, possible upgrades or updates to the property, and marketing the home to a pool of potential tenants. 

Your finances should be able to absorb an out-of-pocket loss of rent should your property sit vacant for any length of time while you market to new tenants. 

Growing Demand

Demand for single-family rental homes has grown by 30% in the U.S. in the last five years and is expected to continue to grow steadily. Because SFRs are in high demand, they tend to appreciate at a higher value than multifamily rentals. 

Advantages of multifamily rentals

Higher Cash Flow

A multifamily rental typically generates a higher rental income than an SFR because of the simple fact that an MFR comprises more units. One single-family home equates to one stream of revenue, while a multifamily home with four units provides four rental streams. 

Because of this, vacancies pose less of an issue with an MFR as well. If a tenant moves out of a 4-unit multifamily residence, the landlord is still receiving 75% of the rental income until that tenant is replaced.

It’s far less likely that an MFR will suffer from 0% occupancy at any given time than an SFR. This safety net of revenue streams usually reduces the risk an MFR will go into foreclosure. 

Able to Scale Faster

Investors can quickly grow a real estate portfolio at once by purchasing a multifamily property. Increasing your portfolio by ten, for example, is easier to do by purchasing a ten-unit apartment building than purchasing ten individual single-family homes with ten separate mortgages.

Securing financing for an MFR might require working with a commercial lender with stricter guardrails, but you’ll be securing a single mortgage rather than ten. 

Economies of Scale 

It’s usually more efficient and cost-effective to manage multiple units under one roof, as well as increase the value of those units with a single upgrade, improvement, or repair. 

If you repair the roof or the HVAC system on a multifamily home, add a pool to the outdoor space, or update the common entryway, you’re completing that project one time but increasing the value of each unit in the building. 

In addition, a multifamily property requires only one insurance policy, one location to market multiple units and host showings, and one location to perform routine inspections and maintenance. 

Most property management companies charge less to manage MFRs as well. Rates to manage a multifamily property are generally about 4% to 7% of the monthly gross income, compared to the average 10% charged to manage an SFR. 

Though some real estate investors focus exclusively on buying one type of property versus another, the reality is that both single-family and multifamily properties have their benefits and challenges. 

A single-family property might be a good choice if you’re a new investor, want to spend less cash upfront, or need the relatively high liquidity and ease with which you can both enter and exit the investment market. 

A multifamily property could work for you if you’re ready to expand and diversify your portfolio, can handle the higher costs associated with owning a multifamily residence, or are willing to share profits and have less control by purchasing MFR property through a syndicate. 

Ultimately, the right property for you will depend on your current needs and long-term goals.