Single Family Homes vs Multi-Family Properties

The age old question – “Should I invest in single family homes or multi-family properties?”  The answer:  It depends.  There are countless ways to successfully invest in real estate.  I know hundreds of successful real estate investors and they all have different niches and ways of doing business.  Your success in a certain asset class will be based on your skills, interests, resources, ambitions, risk tolerance, and short-term & long-term goals.  Let’s take a look at the pros & cons of both single family homes and multi-family properties.  I’m generalizing a bit here, but this is what I’ve found in my experience.

Single Family Homes      

Pros

• SFR properties typically attract a higher end tenant. This means they likely have more disposable income than someone who lives in an apartment.
• There are less expenses for the owner. Tenants usually pay all utilities, so the owner is only paying for taxes, insurance, maintenance, & property management.
• Probably the biggest benefit to investing in single family homes is that they don’t have to only be sold to investors. There is future opportunity to sell to an owner-occupant at a retail price point, offering some larger gains on the exit.

Cons

• When a single family home goes vacant, there’s no income to cover expenses. The owner is on the hook for all carrying costs whenever the property is between tenants.  You also risk break-ins because nobody is there to watch out for the property.
• SFR properties are difficult to scale. It can be very time consuming to drive all around town to check on your investment properties.  Management companies realize this, and charge a higher management fee because of it.
• Residential single family property can be difficult to finance. Federal Housing and Urban Development guidelines currently only allow an individual to hold 10 residential mortgages in their name.  The only way you can grow to 11 or more houses, is by purchasing with cash, private money, or through a bank that holds the note in-house.

Multi-Family Buildings

Pros

• Buildings are very scalable. You only need to visit one location to collect rent, post eviction notices, lease units, meet with tenants and contractors, etc.  There’s only 1 roof to fix, not 50.  There’s only 1 lawn to cut, not 50.  There are only 4 exterior walls, not 200.  Because of this, you’ll receive a discount on management fees.
• Apartments are a lot easier to finance than single family homes. The lender looks more at the property than they do at the individual.  If the cashflow makes sense on the property, the deal will usually get done.  And what’s even more exciting is that loans over $1M are non-recourse on the borrower, meaning you don’t have to personally guarantee the loan.  If the loan goes bad (and it wasn’t something malicious, fraudulent, or grossly negligent), the lender takes back the property and has no recourse against you personally.
• The cashflow is most consistent. In most of my buildings, I only need the property 50% occupied in order to cover all of my expenses.  If I have debt on the property, I need about 75% occupancy.  That means a quarter of my building can be vacant, and I don’t have to come out of pocket at all for operating expenses or my mortgage.

Cons

• Apartment buildings can tend to have a lower end renter. This is not always the case, if you’re buying in nice areas.  But generally, it’s someone who doesn’t have the means to buy or rent a home.
• Multi-family properties have a lot more expenses to manage than single family homes. The owner pays for common area electric, sometimes heat for the entire building, usually water for the entire building, lawn maintenance, snow removal, common area cleaning, and more.  There’s a lot more to pay attention to, and you really have to analyze your numbers properly when looking to purchase an apartment building.
• There’s no retail buyer for apartment buildings. It’s all about the numbers.  This is good and bad.  Good because it’s predictable of what you’ll be able to resell your investment property for.  Bad because there’s only one type of buyer for the property – investors.

Again, it really depends on your personal preferences and goals.  I like apartment buildings because I have ambitious plans to grow a significant portfolio, and I think it’s more easily done with apartment buildings because of the scalability and financing options.  But that’s not to say there aren’t a hundred other ways to invest in real estate and build wealth.  The point here is to pay attention to the costs and benefits of whichever investment vehicle you’re interested in, and weigh those against your long-term goals.  You’ll find the right fit for you.  Just remember…  Don’t wait to buy real estate.  Buy real estate and wait.