This post will discuss the differences between investing in single family vs investing in multifamily. We will focus on the buy and hold strategy, and leave wholesaling, flipping, and other strategies for another time.
I have studied both single family and multifamily investing extensively and found successful people in both areas. There is no clear cut answer to which is the “better” investment. It generally comes down to your personal investing goals and style. At the end I will give my vehicle of choice and why I chose it.
Single Family Pros
- Easy to get started
- Easier to rent
Single Family Cons
- Difficult to scale
- No economies of scale
- One unit means on one flow of income
- Market-dependent valuation
Easy to to get started
Many people are familiar with the purchase of a single family house. Somewhere along the lines you, a family member, or friend as purchased one themselves. The concept and process isn’t foreign to you. You go house hunting with an agent or find out about the property through some common marketing practices. You then do some due diligence (appraisers, inspectors, title company) to make sure the property is actually a good deal. Next, you put a down payment on the property and get a loan for the rest – or in some cases buy it in cash. After that’s all wrapped up, you find a tenant and you’re in business.
For the average person, financing a single family property will be easier than a multifamily property. It simply costs less to do. Putting a down payment of 20-25% on a single family home takes a lot less cash than a multifamily down payment – which can be in the hundreds of thousands. Chances are you won’t have to raise equity if you are doing single family home.
Easier to rent
Generally it is easier to find and retain tenants for single family homes than it is multifamilies. People like their privacy and there is something about living in a house that makes people more secure. Many seasoned investors will say that you will find higher quality tenants as well. They feel like its theirs and treat it like that. In addition, you won’t have to deal with tenants fighting or complaining about each other
Difficult to scale
Accumulating many single family properties will take a lot of work. If you want to build a portfolio of 25 units – you have to source, finance, close, and then manage all of the transactions. Whereas you can purchase a 25 unit multifamily property in one transaction and save yourself a lot of time and effort.
Limited economies of scale
When managing single family properties you are dealing with multiple locations, roofs, heating bills, tax payments, and the list goes on. There will be one of everything for reach property. Somewhere along the lines this will cost you more money.
Managing these properties is also tougher. Chances are all of these properties won’t be in the same place. You can’t send a repair guy over to the property and have him fix 5 toilets at the same location. These will be spread out making the repairs cost extra. If you are managing these properties yourself then you will have a lot of running around to do.
If you are having a management company run the properties, it will cost you more. Usually around 10% for a single family vs 4-7% for a multifamily. This is because there is a lot less income coming from your single family and is harder for the manager to make money.
One unit means one source of income.
With a single family property there is only one unit. If that one individual or family moves out, you are now responsible for the mortgage payment and related expenses yourself.
The price of a single family house is based on the recent sales price of a comparable houses. If you have two houses on the same block that sold for $100k it is likely your house will be priced around the same range. Even if your house is updated and can bring in a higher rent – it won’t effect the value by much.
Unfortunately, residential real estate (1-4 units) is not valued by income. Commercial real estate (5+ units) includes multifamily and is valued by income. This gives you more control over the price of the property.
- Easier to scale
- Economies of scale
- Forced appreciation
- Passive Investing
- Higher barriers to entry
- Higher turnover/tenant issues
Easier to scale
The benefit of multifamily is that each transaction contains multiple units. Like I mentioned above, it would take 25 single family transactions to obtain 25 units, while you can buy 25 units in one multifamily transaction.
On your next transaction you can scale up to 100 units and do another with 150 units on the next. You could potentially have 275 units (or more) in three transactions. Whereas that would take 275 single family transactions to do the same – and that’s a ton more work.
Economies of scale
When there are multiple units in one location it becomes cheaper to manage and maintain. Less transactions and less bills to keep track leads to lower accounting and attorney fees. And since each unit is very similar you can save on the cost of repairs and maintenance.
Usually the fee that property management companies charge is between 4%-7% for multifamily, which is lower than single family. This is because of economies of scale. The PM is able to manage multiple units in one location – that volume allows for lower rates to be charged. Since multifamily properties generate higher income, there can be enough money to higher better property property management companies or even onsite managers.
Multifamily properties that have over 5 units are valued by the income they produce. As mentioned above this allows the owner to have a greater degree of control over the price of the building.
Increasing rent and/or decreasing expenses can increase the income and therefore the price of the building. This can be done by repositioning the property through capital improvements (renovations) and/or more efficient management.
In many multifamily deals there is enough “meat on the bone” if you will to bring in private investors. If you don’t have the time or desire to be an active real estate investor, you can invest money into someone else’s deal. The manager, or sponsor, the deal will put the deal together and manage it from start to finish and give you a return on your money. In most cases this return is higher than that in which you receive from your retirement fund or stock portfolio.
Usually you can invest by buying an equity stake in the entity that holds the property or by loaning the entity money in the form of a loan. Generally buying equity gives you more of an upside as returns can be anywhere from 8-20%+ in some cases. Equity can also expose you to the downside of the investment as well. When you loan the money you will receive a return in the form of interest. The interest payment fill be fixed, giving it more stability but doesn’t give you any upside and can result in a lower return on your money.
You will be kept up to date on the properties progress through monthly or quarterly calls or webinars. Some investment companies will give you access to an investor portal that gives you the real-time status of your investment.
Higher barriers to entry
Investing in multifamily properties takes a lot of capital. This is a huge barrier of entry for most people as the down payment required is substantial when comparing it to a single family property. Obtaining the cash for this down payment can be onerous.
The average person understands single family properties. Whereas multifamily properties aren’t a different animal and take a certain amount of education to grasp. The level of networking required to do these types of transactions is also a big task. The investor will need to build credible relationships with brokers, bankers, investors, and others. This process is much less extensive in single family.
The good new is – you can avoid these barriers by becoming a passive investor as described above.
Higher turnover/tenant issues
Depending on the class of the property, the tenant quality can be less than desirable. Collecting rent might could become an issue along with tenants not getting along or damaging the property.
There is generally higher tenant turnover in multifamily. Higher tenant turnover leads to higher expenses in lost income, turnover costs, leasing fees, and more. Some tenants simply live a lifestyle where they move from apartment to apartment. Other tenants may not feel the feeling of ownership and are simply not tied to property the way they would a home.
Why I favor multifamily over single family.
In short, there are few key reasons I chose multifamily, economies of scale, forced appreciation, and cash flow. More units can be bought in less transactions. If you can improve the property and raise rents, the property is worth more. The cash flow generated be more significant and will provide sufficient funds to hire a third party property manager. This allows time to go and purchase more properties or focus on other opportunities. And at the end of the day it is the faster way to wealth.