As real estate syndicators our most frequently asked question by far is ‘ Why should I invest in multifamily real estate rather than in single-family homes?’.
Our response always starts with- “there are many ways to make money in real estate”.
In this article, we will give you more insight into the differences between multifamily vs single family real estate investing and show you why multifamily real estate investing is our bread and butter.
As investors who first started in the single-family real estate investing space, we hope to provide you with some insight into our comparison of these two asset classes with the end goal being to educate and inspire investors to make the best investment decision for your personal criteria and financial objectives.
Examining Multifamily VS Single Family Real Estate Investing
1. Forced Appreciation
An incredible benefit to real estate investing is forced appreciation. Forced appreciation refers to the increase in the value of a real estate investment property due to an investor’s actions.
In single-family investing, although homes can be renovated or ‘flipped’ to increase the selling price, single-family homes can be at the mercy of the market, and the prices of homes in the same neighborhood also known as ‘comps’.
Multifamily properties, however, are not at the mercy of the market and have higher leverage to force a property’s appreciation through many different strategies to increase NOI and cash flow.
In multifamily, many syndicators choose to invest in value-add apartment complexes for the ability to dramatically force a property’s appreciation. Here is a good post on a value-add strategy for multifamily investing.
2. Cash Flow
One of the largest benefits, if not the largest benefit to multifamily investing is cash flow.
In multifamily real estate, investment properties will receive higher cash flow and return than a single family investment property.
As mentioned previously, having a higher amount of cash flow will also mitigate risk and adds a safety net to your investment in case unexpected expenses and vacancies occur throughout your hold time.
3. Economies of Scale
What are economies of scale? Economies of scale defined by investopedia as ‘cost advantages reaped by companies when production becomes efficient in other words its economic advantage due to output or size with your cost per unit in most cases, decreasing.
In buying apartments, the cost per unit will be cheaper than the cost per unit of a single-family home.
Along with the cost per unit, when hiring a vendor for a multifamily investment property, you will also receive much higher economies of scale than you would for a single-family rental property.
Economies of scale will vary between various multifamily complexes. The more units you own- the larger your economies of scale!
4. Barriers to Entry
Many potential investors may have the limiting belief that the only type of real estate investing they can financially participate in, would be single-family rentals. In other words, single-family homes hold easier entry due to their lower purchase price compared to multifamily investment properties.
That is when we tell our fellow friends and investors the beauty of real estate syndications.
Real estate syndications allow investors to pull together their capital with other investors, to purchase an asset that is much larger than they could afford or manage on their own. Syndications allow entry into multifamily real estate a lot easier than many investors think is possible!
Whether you are interested in becoming a syndicator or if you investing passively in multifamily real estate, either option is tangible. As mentioned previously there are many ways to make money in real estate. It’s all about choosing the right investment for your personal criteria and getting started.
5. The Differences in Risk
When it comes to single-family vs multi-family investing, multifamily is less risky in terms of vacancy and the ability to cover unexpected expenses that occur on an investment property and we all know…. these WILL occur.
In terms of vacancy for a 60 unit apartment complex, it is very unlikely to obtain 100% vacancies, and if vacancies do occur there will still be cash flow collected from other units that will cover the expenses of any vacancies.
Additionally, when it comes to multifamily properties, they are producing a TON of cash flow. Meaning when unexpected costs do occur, there is enough cash flow coming in from the property to cover any unexpected expenses.
On the other hand, when investing in single-family homes, vacancy risks are very prominent. If a single vacancy occurs this could completely hinder all cash flow leaving all expenses held upon the investor. This risk is also transferable when it comes to coming across unexpected maintenance issues.