Single Family vs Multifamily

Category:
Real Estate Investing 101
|
By:
Sam Henry

Single Family

Pros

Higher Cash-On-Cash Returns - Apartments generally produce cash on cash returns of 10% - 20%. The yield on single family houses can be much better. In some markets it's possible to see single family investments that produce returns as high as 30%.

More Affordable - Single family houses can be purchased at much lower price points than apartment buildings. Investors typically have the money to buy and finance them on their own.

Easier to Sell - The potential pool of buyers for single family homes is much larger than the pool of buyers for multifamily buildings so they're easier to sell. Also, owner-occupant buyers tend to make decisions based on emotion rather than detailed financial analysis.

Cons

Difficult to Scale Quickly - Finding single family deals is easy but finding lots of single family deals (where the numbers make sense) and closing them in a short period of time requires lots of work. Not to mention if these houses are in need of renovation. You're in for a lot of work. Scaling in single family is possible but it will not be easy.

Vacancies Have a Much Larger Impact - When a single family rental is vacant, you immediately go from 100% occupancy to 0% losing all income from that property. If it's your only investment, it can hurt pretty badly. Hopefully, you've set aside some reserves.

Values Dependent on the Market - The values of single family houses are driven by the comparable sales of other houses in the area. Increases in income have no effect whatsoever. Having the value of your investment tied to the ups and downs of the residential real estate market can work for you or against you. Either way, you can't control it.

Multifamily

Pros

Easier to Scale - Buying 50 single family houses means 50 separate transactions. That means 50 contracts, 50 inspections, 50 appraisals, 50 closings, etc. If you're financing all 50 using banks, it could take up to 50 months. Compare that with buying one, 50-unit apartment building all in one transaction, which you could have wrapped up in 90 days.

Cheaper to Manage - In the multifamily world, it's customary to build in the cost of a professional property management company into the operating budget. A good professional property manager will be better equipped and prepared to run the day-to-day operations of your property than you would be on your own. This frees up your time to find more deals and makes for a truly passive investment. There are property managers for single family rentals too but they're going to charge about 10% of the gross rent. Depending on the size of the building, multifamily property managers will range between 5 - 8%.

More Control Over Value - Single family houses are typically valued on comparable sales of similar properties in the area. Residential buildings that are 5 units or more are considered, commercial real estate. Commercial real estate is typically valued as a multiple of its net income. This means that any improvements an investor can make to an apartment building that either increase its revenue or decrease its expenses will directly increase its value.

Cons

More Expensive to Buy - Apartment buildings are simply bigger than single family houses and thus, they'll typically cost much more (unless you're buying a house in San Francisco). Most investors see the larger numbers and immediately assume that it's out of reach. The truth is, in multifamily, you're not limited by the amount of money or credit your personally have to invest.

Conclusion

Both multifamily and single-family properties can provide excellent investment opportunities. Single-Family deals are easier to find and fund on your own. However, if you want to scale up your real estate investing business fast, benefit from economies of scale, and make more efficient use of your time, then buying multifamily apartment buildings is the way to go.

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