Single-Family VS. Multifamily Investing: Which Is Right For You?
By JD Esajian on September 2, 2015
There are many different ways to invest in real estate. For every different scenario there is a corresponding opinion that usually comes with it. One of the items that is often debated deals with which property type is better: single-family or multifamily properties. The simple answer is that it depends on your risk tolerance and what you want out of the property. Both can make strong points for why it should be the preferred investment. Ideally, your portfolio will have a mix of a few different property types. If you are still deciding which way to go, here are a few arguments for and against each respective view:
Single-Family Properties
This is the most common starting point for investors, both old and new alike. The main reason for this is the large pool in which buyers can draw from. This works to investors’ advantage, whether they are looking to rent or flip the property. If all things are equal (price & space), most renters would prefer to live in a single-family property. They don’t want to have to share a driveway or fight for parking spaces with another tenant in your property. This is also the case with prospective buyers. They would prefer to buy single-family homes (or condos) over anything else. Because of this, single-family homes can retain their value and demand much more than another or property type.
It is also much easier to calculate the bottom line on a single-family property. With a single-family property, there is a clear distinction as to what the expenses will be. You know what the expenses and costs are, and where they are coming from. This makes it easier to estimate cash flow, and to know exactly where you stand with the property. Rent collection is made easier as well. Instead of chasing two, three or more tenants for their rent, you will have one check every month.
Property management is a much easier task on a single-family property. There is only so much space that needs to be managed. This should help reduce property management fees or make your task easier if you opt to manage the property yourself. The turnover for a single-family property is often much lower than that of a multifamily property. It is not uncommon to find a single-family tenant that will stay in the same property for years. This provides stable income, a tenant that takes care of the property and reduces any need to spend money on advertising for new tenants.
Multifamily Properties
As the name would indicate, a multifamily property is any property with multiple units. Most investors venturing into this area start with anywhere from two to four units. Once you jump over four units, loan approval guidelines and programs change. The first benefit of investing in more than one unit is that you have more than one income coming in. While the expenses can be higher, you also have the comfort of knowing that you have more than one tenant sending you a rent check. On a single-family house, if the tenant decides not to pay you have no other source of income. With multifamily properties, you can take some comfort in knowing that you have other income to fall back on.
Multifamily properties also offer what is referred to as the economy of scale. This means that regardless of the number of units you still only have one roof and one lawn to take care of. Theoretically, this should cut down on your expenses and improve your bottom line. If you stagger your lease start dates on a multi family property, you should be able to have rental income coming in every month. You may have to cover some of the mortgage payment, but never the whole amount.
Single-family properties may offer a steady buyer pool, but multifamily properties can often appreciate at a much higher level. The right multifamily property in the right area can take off in value and provide a greater return on your investment. If you opt to hold, not to sell, it can be the pillar of your portfolio for many years. What typically happens is that once you get a taste of owning and managing a few units, the desire for bigger projects starts. Once you make the jump from one unit to three or four, the next step from four to ten is not as difficult as originally thought.
The bottom line is that there are pros and cons with every property you get involved in. Prior to making any offer you need to have an idea of what you want out of it. If you plan on being in and out in a few years a three family property may not be a good idea. It can have a greater short term return but it may be difficult to find a buyer. If you are looking to add a rental property that you want to hang onto for the foreseeable future a multi family may be more for you. If you are looking to rent for one to two years max then sell a single family home is the way to go. Whatever you decide you should know there will be people that will always be for or against whatever you do. You can listen to them but at the end of the day the decision should be your own. What works for one investor may not work for you and what you want to do.