Single Family and Multi Family homes can both make great investments. There are, however, a few differences between the two you should keep in mind when deciding what type of property you are going to purchase and keep as a rental.
I’ll start by making sure we define each of these. Single Family homes are pretty self-explanatory. These are a single residence with one roof. A multi family property is anything with 2 or more units under one roof. MF properties can either be considered residential or commercial but the pros and cons are still pretty much the same no matter how many units there are.
Let’s start with property cost. MF properties almost always have a cheaper per unit cost than SF. You tend to get more bang for your buck going with MF.
As far as financing goes, most banks limit you on the number of mortgages you can get in your name. Typically 10 is the max if you have great credentials and can qualify for that many. More often than not, that number usually ends up being between 4 and 10 mortgages before you are tapped out. Anything after 10 you usually need to find a local bank or portfolio lender to fund your deals. This is another area where MF reigns supreme. If you get 10 mortgages on SF homes, that leaves you with 10 units. However, you could get 10 four unit buildings with those 10 mortgages and end up with 40 units! MF wins on # of doors you are able to finance.
Next is maintenance and capital expenditures. A SF home usually ends up costing more per unit for maintenance than a MF building. The reason behind this is that there are shared aspects in MF buildings. There is one roof, one yard, one driveway, and shared walls. More often than not, this usually makes the per unit maintenance and capex expenditures much lower than SF homes.
When it comes to management MF homes are much easier to manage since all of the units are in one location. If you have 4 SF homes vs 1 four unit building, it is a lot more convenient having all of the units in one place. You also only have to do bookkeeping and maintenance records for 1 building rather than 4 separate buildings. MF wins when it comes to ease of management.
Vacancies are much less of a burden with MF properties. If one of the units goes vacant, you aren’t stuck paying for the entire mortgage payment by yourself. There is still income from the other unit/s to help out. With SF properties the entire mortgage payment is on you during a vacancy. MF properties help reduce risk in this aspect.
Finally, MF properties tend to cash flow better than SF. For all of the reasons above, you usually end up getting a better ROI with multiple units under one roof. This is not always the case, but more often than not it is. Now onto some of the pros of buying SF properties!
Usually SF homes are in more desirable locations than MF properties. SF homes tend to be in more suburban areas while MF are usually prevalent in urban areas. Better areas often have more safety, great schools, and some peace and quiet.
More often than not the quality of tenant you get in SF homes is better. SF homes tend to attract more long term tenants who treat the home like it is their own. A tenant that is looking for a place to treat as their own and take care of is usually going to be of higher quality. In MF properties, most tenants do not treat the property like it is their own and are more transient. As a result of them being careless it could add up to more maintenance costs for the owner upon move out.
You usually see fewer vacancies with SF homes compared to an apartment. More often than not, tenants in SF homes stay awhile and don’t plan on moving in a year or two. This is a big help to landlords because vacancy costs can really add up. Between not getting rent, having to pay for utilities, and paying for repairs upon move out, no vacancy is ever cheap.
SF homes usually appreciate more than MF properties. MF properties are better suited for cash flow and tend not to appreciate as much as SF homes. This appreciation is usually a result of owner occupant homebuyers overpaying to live in properties and areas that they love. The appreciation helps to make up for getting less cash flow on SF homes.
Finally, SF homes have an easier exit strategy than MF. When it comes to selling SF homes, you have a much larger buyer pool. Your end buyer could be an owner occupant looking to live in the property themselves or an investor looking to rent it out. Owner occupants tend to overpay for properties they love as well. Whereas on MF properties, the end buyer is usually going to be an investor. Most investors don’t pay top dollar for properties so this puts you at a disadvantage as the seller looking to make the most money on the sale.
As you can see, both single family and multi family properties have advantages and disadvantages. As long as the numbers make sense, both of them can be very profitable investments. What you decide to invest in ultimately comes down to what you are the most comfortable with. In my opinion, I think a portfolio comprised of both is the best strategy!