When you’re just starting out as a real estate investor, it can be hard to decide between multifamily vs single-family homes. We’ll help you understand the differences and which might be best for your investment strategy. 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 their personal criteria and financial objectives.
Investing in Single Family Homes
Single-family homes are a type of residential building. These buildings are designed for one owner and don’t share walls with other units. The main difference between single-family and multi-family homes is the number of residences they contain. When it comes to investing in a single-family home is the act of purchasing and renting out a house or condo to one tenant. Single-family homes are great to start for new real estate investors looking to get started. Let’s discuss the 3 benefits of investing in single family homes.
The 3 Benefits of Investing in Single-Family Homes
Benefit #1: Easier Entry
When you buy a single-family home, there are more deals in the market than multifamily properties. There is a lot more inventory to get a start on your portfolio. Single-family investing has low barriers to entry, and this is why it is a great place to start for first-time investors who want to get their feet wet in the real estate industry. The price of single family homes is much lower than multifamily properties, so you’ll need a lot less capital up-front to secure your first investment.
Benefit #2: Easier Exit
If you’re not making the returns you want or if owning single-family properties isn’t all you hoped for, then selling your home should be quick and easy. Selling often won’t be as easy for multifamily buildings and so the process can take much longer than just selling one home in order to recoup some of that money lost from depreciation and vacancy periods.
Benefit #3: Longer-Term Tenants
You’ll find that single-family homes are a great place to invest in as long-term tenants will be drawn to the properties. This is because people who rent these types of property tend to be families or couples, and they’re more financially stable than singles so you can expect them to stay for longer periods of time. This is great for single-family investors in terms of stress and cash flow.
The Cons of Single Family Investing
Now that we have walked through the benefits of investing in single family homes let’s discuss a few of the cons.
Con #1: Lower Cash Flow
When it comes to investing in single family homes, cash flow isn’t as strong unless you own a couple of properties. With multifamily rentals, there’s much more cash flowing in because of the multiple units or apartments that are being rented out and generating strong cash flow for the investor. This moves us to our next point, scalability.
Con #2: Lack of Scalability
It’s a lot more work to build a big real estate portfolio with single-family properties. You have to do the marketing, find the property, handle tenants, negotiate the price on multiple assets, finance multiple properties, etc. With a 10 unit multifamily property, you could over 10x your cash flow with just one purchase, making single-family homes a lot less scalable than multifamily properties.
Con #3: Risk in Vacancy
There are a lot of disadvantages to having just one or two properties, and it can be detrimental to your cash flow in the event that someone vacates. It’s important for landlords with only 2 units to fill vacant spaces right away before they lose too much money from unpaid rent. Missing even one or two months’ rent payments can lead to serious issues, such as falling behind on your mortgage and having to sell your property.
Investing in Multifamily Properties
A multifamily home is any residential property with more than one housing unit, such as an apartment complex. When it comes to investing in multifamily properties there are a few avenue’s an investor can take, two of them being multifamily real estate syndication, vs buying your own multifamily properties. Whether you are looking to take down your own deals or invest in syndication, in this section we will cover the pros of cons of investing in multifamily investing.
3 Benefits of Multifamily Investing
Benefit #1- Expand your investment portfolio 10x faster
Investing in multifamily real estate allows investors to scale rapidly compared to single-family homes. Buying one 10-unit property would be more efficient and profitable than trying to buy and manage 10 separate single-family properties.
Benefit #2 – Strong Economies of Scale
When it comes to multifamily, investors will receive economies of scale when it comes to costs per unit. Investopedia defines economies of scale 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.
When buying apartments, the cost per unit is cheaper than for a single-family home. Along with this lower price tag comes higher economies of scale when contracting out CAPEX projects.
Benefit #3 – A Stronger Leverage to Force 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 are 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.
3 Cons of Multifamily Investing
Con #1- High minimum investment
When it comes to multifamily investing if you do not have a large amount of capital on hand for a down payment it can be hard to purchase a multifamily property by yourself. But even in the case of multifamily syndication, the minimum investment can be as high as 50K which may not be feasible for many new investors looking to get started. This is where multifamily real estate syndication comes in; Multifamily real estate syndication allows you to partner up with other investors to take down a larger multifamily property.
Con #2: Management Intensive
Unless you are a passive investor in multifamily, management can be a challenge. When it comes to managing the leasing, maintenance, and tenant issues of a multifamily property this can take up an immense amount of time and stress for multifamily operators. Even when outsourcing to a third-party multifamily property management company, it can be a challenge to ensure your management company is operating your property at optimal performance to achieve your investment goals.
Con #3: Highly Competitive
Investors looking to enter the multifamily property market often find themselves at a disadvantage due to intense competition. This can be attributed partly because many experienced investors have already been drawn toward this type of investment, which makes it challenging for new investors to get started.
Summary of Single Family vs Multifamily Investing
When it comes to investing in single-family vs multi-family at the end of the day, taking down your own multifamily properties will be more lucrative and time-intensive.
If you’re just starting out as a real estate investor, looking to do it yourself, single-family rentals are the most straightforward way to get into the game. You’ll need less capital to get started and have more exit options should things go south. However; if you are interested in a more hands-off approach- multifamily real estate syndications may be your best bet to take advantage of a large lucrative investment opportunity- completely hands-off!