If there’s one thing that divides most real estate investors, it’s the debate on single family rentals versus multifamily rentals. While some people swear by the efficiency of the multifamily property, there are others who steadfastly support the simplicity of the single family property.
Two Sides of a Coin
Single-family homes as well as multifamily homes are proven real estate investment vehicles. While both types of rentals have great track records in terms of income generation, they vary on multiple accounts. Most often, there is no right or wrong, but just what’s apt for your particular circumstances as an investor. The kind of rental property you choose will reflect what stage your career is at; how deep your pocket is; and what long-term real estate strategy you plan on using.
Having said that, it’s important, especially for novice investors to understand the pros and cons of both these rental types. Understanding what sets them apart can go a long way in not just deciding what’s best for you now but probably even the direction of your entire investment career.
Advantages of Single Family Properties
1. Greater Inventory and Affordable
When it comes to single family homes, it’s obvious that there isn’t any dearth of inventory. Every year, about five million single family houses are placed on sale, making it a high volume market that allows investors to shop around for great deals. It may not be so in bigger cities, but if an investor expands their area of operation, there’s a great deal of single family homes that can make them steady income. Besides the large inventory, the biggest advantage of single family homes is their affordability. It’s much easier to secure financing for such homes, when compared to multifamily homes. If you’re ready, you can even pay for them entirely by cash or, rope in a partner. They are perfect for investors who are just beginning their careers and want to gradually build their investment portfolios.
2. Better Appreciation
It’s a proven fact that appreciation is better when it comes to single family homes. Especially, if they are located in a neighborhood that has great features, like a great school district, access to amenities like shopping, restaurants and entertainment, the prices are bound to go up over time. Additionally, if sensible upgrades in line with current design and market trends are made to the property, then you stand to gain much more. Even without any upgrades, a gently used single family home is much likely to appreciate when the market is stable.
3. Lesser Turnover
When it comes to single family homes, the kind of people that rent them are mostly families with children or couples looking to settle down and start families. These people are looking for stability in their lives, which begins at home. They are not the kind who are likely to up and move within a year or sooner. Instead, they are people who are probably interested in experiencing living in a house, but don’t yet want the responsibility of a mortgage or big ticket maintenance. All these factors make for lesser turnover, which means lesser worries for you, the landlord.
4. More Ways to Exit
When it comes time to sell, single family homes are some of the easiest properties to sell because there are many types of buyers interested in such properties. They appeal to
• people looking to buy their first home
• people hit by financial hardship and forced to downsize
• growing families looking for bigger homes
• other investors
• home flippers
With such a large pool of interested buyers, investors often breeze through the resale of their single family homes, as long as they’re well maintained and meet the expectations of target buyers.
5. Better Locations
Since most single family homes are owned by people with steady incomes, children and/or pets, they tend to demand certain things out of the neighborhoods they are located in. Single family homes are often ideally located, when compared to multifamily homes. And in the real estate investment industry, the location of your property can make or break your business. Of course, there are single family homes located in bad neighborhoods, with poor access to amenities. However, most investors tend to choose properties that are located in great neighborhoods, which will remain great when it’s time to sell as well.
6. Easier to Manage
Many investors believe that it’s far easier to manage single family homes because, as landlords, they aren’t responsible for the utilities. Also, when it comes to families living in such properties, they generally treat it as their own home which translates to gentle use. On the same lines, such tenants also tend to fix small issues by themselves which requires the landlord to step in only when there are capital expenses.
Disadvantages of Single Family Properties
1. Expensive to Manage Professionally
If you’re an investor who has multiple single family rental properties flung across various parts of town, then it will very likely turn into a nightmare for you to manage them all singlehandedly. In such situations, the sensible thing to do is to hire a property manager. However, be warned that they charge much more for multiple single family properties when compared to multifamily properties.
2. Not as Scalable as Multifamily Homes
While single family homes are a great way to begin your investment career, they aren’t always the best way to scale your business. You can definitely build up an impressive investment portfolio, buying one or two houses every couple of years. However, you won’t be making as much money as you would from a single multifamily property.
3. Price Set by Comparable Homes
When it comes to the sale of a single family home, the price is always dictated by the market and comparable homes. The value of such properties depends on the demand and supply of buyers who plan on occupying the home themselves.
Advantages of Multifamily Properties
1. Efficient as Investment Vehicles
In the real estate industry, your success is only as much as your efficiency – doing things fast and well is bound to bring in the money. And that’s probably one of the biggest reasons why so many seasoned investors swear by the multifamily property. It gives you the opportunity to hit your target in one single buy, rather than having to achieve it incrementally, one house at a time. It definitely takes more money to invest in a multifamily property and it does involve a lot more work as well – but those are necessary evils when you look at the kind of money you stand to make.
It’s quite obvious that the scalability of the multifamily property is at the core of its allure. Nothing can compare to the rate at which a successful multifamily rental can increase your monthly income. In one shot, you will skip all the legwork required to buy and rent out several single family homes and yet, you will be making much more in terms of profit.
3. Lower Vacancy Expenses
When it comes to real estate investing, the vacancy rate of your property is an important consideration. The longer it lies vacant, the more it eats out of your pocket in terms of utilities and maintenance. This is especially true when it comes to single family homes. On the other hand, multifamily properties are sort of insulated against the effects of vacancy – the income streams from all your other occupied units will usually compensate for the ones that are lying vacant.
4. Better Returns
The success of any investment depends on its capacity to fetch great returns on investment and multifamily properties promise excellent returns in most cases. Besides their scalability, they actually cost less per unit (when compared to single family homes) and any upgrade made to the property has a rippling positive effective on all of the units within the property.
5. Inexpensive to Professionally Manage
When it comes to multifamily properties, that have more than four residential units, the ideal thing to do is to hire a property management company to manage the day-to-day affairs of the property. This is not just an efficient way to manage your rental properties, it is also a cost-effective way because such firms charge lesser (compared to single family homes) to manage multifamily properties. Overtime, the professional management of your rental properties will not just become more profitable, but will also free up your time, allowing you to focus on your business.
6. Lower Price Per Unit
Though multifamily properties cost more upfront, and need the investor to be financially sound, they are actually cheaper when you break down the numbers. Compared to an investor acquiring single family homes, you will be spending considerably lesser on every unit that’s within your property.
Disadvantages of Multifamily Properties
1. More Investment Upfront
As mentioned above, multifamily properties require a massive amount of investment to begin with and not all investors can afford to buy them. Which is why they are often bought by investors who have developed enough cash flow in their businesses to afford them. Usually, they aren’t within the reach of people who are just starting out.
2. Damaged by Tenants More Often
Besides being fickle as tenants, young and single people also tend to be harsh on the property. They know they aren’t going to live their entire lives in your apartment, which makes them not really care for the space sometimes. Some of the major damages are borne by the carpet, walls, countertops and bathrooms of apartments.
3. Landlord Responsible for Utilities and Upkeep
Unlike single family homes, where the landlord can happily forget about paying for utilities, landlords of multifamily properties are responsible for things like water and sometimes even electricity and gas. Besides these, the landlord needs to make sure the curb appeal of the property is in good shape as well.
The Bottom Line
More often than not, multifamily properties are seen by investors as the next step in their careers. It’s always safer to start with single family homes when you’re new to investment. However, it’s not impossible for a new investor to win with a multifamily property – it will just be much harder and will require greater financial soundness. Whatever be the investment property you choose, it needs to conform to your long-term goals and aspirations as a real estate investor.