There’s a lot of debate about whether to invest in multifamily real estate or single-family real estate for the long term. Both have their pros and cons and are both a good means to wealth building, but we believe one, in particular, is the long-term winner. The natural evolution of most investors leads to commercial real estate, this is mainly because it gives investors the ability to purchase larger cash-flowing assets in each acquisition with less risk.

There are many differences between the two asset classes, the main differences are in operational efficiencies, the liquidity of each asset type, the financing options available, and tenant turnover to name a few.

In this article, we’ll break down the advantages and disadvantages of both types of real estate.

Key Takeaways

  • Single-family homes are great for investors who want to actively manage their property. They are also great for beginners because there is less competition when buying, and they are easier to finance.

  • Multifamily rental properties are a much more difficult asset class to penetrate due to the complexity of the buyers you’re up against.

  • There are far more operational issues with managing 100 separate tenants in 100 houses scattered throughout a city. It’s much easier to operate from a property management standpoint if all 100 tenants reside on the same site in one multifamily apartment complex.

  • Multifamily properties are the most robust insulated asset class that provides all the best characteristics real estate investing offers.

Single-Family Real Estate Investing

  • Fewer Barriers to entry

  • Lower tenant turnover

  • More liquid

Fewer Barriers to entry

Getting involved in single-family real estate requires significantly less capital to get started. Single-family properties generally require a much lower down payment, deposit, and the transaction costs are much lower.

Lower tenant turnover rental property

Due to the nature of single-family property having generally one or two tenants, you should be able to achieve lower turnover as you can put more focus into finding and vetting the best tenant to lease your property out to. But a common recurring problem in single-family is if your tenant leaves, you’re 100% vacant and forced to cover the expenses out of pocket.

When we say it’s cheaper to start, we’re not only talking about the purchase price. It’s also about the down payment and other terms, as well as the financing itself, which are all more expensive for commercial real estate appraisals and there’s greater liquidity when it comes to selling.

It takes time and money to replace a tenant. You (or your property manager) must coordinate cleaning, mending damages, and general wear and tear, as well as advertise and show the listing every time someone moves out. Not to mention the loss of revenue from renting out the space while it’s unavailable.

In a nutshell, single-family is just a much larger, and more liquid market in general as an asset class. So, it’s a simpler product to sell since they are less expensive and there is a lower barrier to entry, with a much larger selection of potential customers. It’s not just real estate investors that buy and sell properties or real estate in general. But when it comes to single-family residences, you have a huge group of people who live where they buy.

More liquid rental properties

Single-family is generally more liquid in comparison to multifamily. The single-family real estate marketplace is much larger in terms of transaction volume and would be easier to firesale a property in the event that you needed to do so.

Multifamily Real Estate Investing

  • Higher monthly cash flow

  • Economies of scale

  • Operational efficiency

  • Better financing options

Higher monthly cash flow

Multifamily buildings are more complex to purchase and operate, so it can be difficult to find a buyer if you decide to sell. Multifamily cash flow is generally higher than single-family and more stabilized, for example, let’s say you have a 100 unit building and 15 units are vacant, which means you have an 85% occupancy. A lot of buildings can still be quite profitable or breakeven at worst with vacancies as high as 20-30%!

Economies of scale

Furthermore, scaling is tough because finding a good property management firm needs a higher percentage of your monthly revenue to manage the property for you, which puts a strain on your cash flow. When you compare this to multifamily, property management firms will ask for a lower monthly percentage of the property’s overall income.

Multi-family property accompanies large cost savings, also known as economies of scale in economics. So when you have more units under one roof, you’re saving money on common area renovations and mechanical upgrades like the boiler, hot water tank, and roofs. The economies of scale with multi-family units, especially as you go larger in unit count, gets you to lower management fee to operate the property. This could be somewhere between 3% to 6% whereas in single-family it could be as high as 10%.

Also, people are not being sent to various regions because all of your tenants would be on one site. Property management may be completely local and onsite property managers are employed if the structure is big enough, which is typically above 100 units. Lastly, building a massive multi-family property portfolio is much easier and more profitable long term. This is one of the main benefits of multi family investing. As you reach economies of scale, your cost per unit lowers in terms of management and expenses. If you’re interested in building a long-term, lower maintenance cash machine, multifamily real estate is the vehicle of choice in our opinion for sure!

Operational efficiency

There are far more operational issues with managing 100 separate tenants in 100 distinct houses scattered throughout a city. It’s much easier to operate from a property management standpoint if all 100 tenants resided in one multifamily apartment complex on the same site. The headache of traveling from house to house, collecting checks, and performing repairs are what adds constraints to the way property management engages with the tenant base and operates the property. Multifamily buildings offer the potential for higher returns than single-family homes. This is because investors can charge more per unit and have fewer management costs.

Better financing options

Multifamily buildings are typically easier to finance than single-family homes. This is because lenders see multifamily as a safer investment and they are more likely to give you a loan for a multifamily property.

Loans in the multifamily arena are sometimes easier to qualify for in comparison to a single-family home. This is because single-family is sometimes looked at as a higher risk for foreclosure as monthly cash flow can sometimes be harder to attain, therefore weighing the qualifications heavier on the borrower’s income, as opposed to the asset income.

It’s also worth noting that banks like the prospect of lending over $1,000,000 into a stabilized property. They find more stability in the upside of rental income the building generates on a month-to-month basis.

Some lenders have a more stringent approval process and higher multifamily loan rates. However, financing is complicated, and individual situations can vary greatly — especially when it comes to such a broad term as multi-family dwellings. That said, obtaining a loan for a multi-million-dollar apartment complex might be simpler than getting one for a single-family property. But if you are co-investing with a syndicator, for example, the syndicator/sponsor of the deal would be the one qualifying for the financing so this wouldn’t be a hurdle for investors that are participating in the deal.

Single Family Vs Multi Family Investing - Conclusion

Many blogs for multifamily also like to compare the two asset classes and highlight the risks involved with either an apartment complex or a single-family home that is mainly related to the individual property. So make sure to do your due diligence when investigating a property to buy or rent to ensure you’re comfortable with the risks involved.

Multifamily properties are the most robust insulated asset class that provides all the best characteristics real estate investing offers. Although getting started with single-family may seem more attainable due to its lower barriers of entry, investing in multifamily doesn’t mean you have to operate it actively.