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Multifamily Vs. Single Family Investing

Multifamily Vs. Single Family Investing

Which is better, single-family or multifamily investing? 

There are clear similarities between these two real estate sectors. Yet, there are also significant differences as well. Some see single-family rentals as an investment for getting your feet wet and working up to multifamily. Others have found success in skipping right to multifamily investing. 

Both are very popular, with single-family rentals as an investment now almost neck and neck with multifamily. Markets are each worth close to $3.5T. 

The Commonalities

Both of these types of investments are hard assets. They are tangible assets. Meaning that they always have value. Even real estate values can fluctuate. Yet, they are typically far less volatile than other asset classes. Compare this with the public stock market or cryptocurrencies, which can see 40% or deeper crashes in hours, and which can go down to zero, possibly leaving investors with nothing. 

Both multifamily and single-family properties also offer income potential. They can be leased for monthly cash flow, and produce monthly ‘dividends’ and appreciation, which builds long-term wealth. All simultaneously. 

That’s in addition to all of the tax benefits real estate investing is famous for. 

The Differences Between Multifamily Vs. Single Family Investing

These asset classes also have some notable differences as well.

First, let’s clarify the differences between these classifications. Generally, single-family residences (SFRs) refer to detached, stand-alone residential homes. You can think of most multifamily (MF) properties as apartment buildings or entire apartment complexes. 

Diversification

Diversifying is one of the most basic principles of investing. Unless you are a fund or institutional investor, it is hard for most to diversify enough with single-family homes. Apartment buildings on the other hand encompass a variety of tenants in one asset. The likelihood of 100% vacancy or having zero income from one of these assets in a given month is extremely low. Whereas, if you only own one single-family rental home and that tenant doesn’t pay or moves out, you are coming out of pocket to cover the carrying expenses. 

Asset Prices

While you may find whole apartment buildings in the Midwest for less than the cost of an average home in NYC or Seattle, typically on a local level, you will find the cost per door for each multifamily apartment unit is much less than a nearby single-family unit. The rents may not always be that different either. Creating better yields on each unit. Though a neighboring apartment building is going to usually cost more than a single home. Many individuals don’t have the financing to take on MF on their own. 

Economies Of Scale

One of the huge advantages of MF is the economies of scale it offers. It is far more efficient to manage 10, 20, or 100 units in one place than the same number of single-family rental investment properties spread out around town or across the country. It’s cheaper, faster, and more effective. In turn, the management and net are more profitable. 

A part of this is also getting a lot more out of the same piece of land. If you can either have one single-family home on a lot or six rental apartments, the MF option is going to create a lot more cash. 

Exit Options

When it comes time to exit an investment, single-family homes may have a wider variety of buyers to choose from. Including, regular retail home buyers, small individual and ‘mom and pop’ investors, and bigger funds. Buyers of multifamily properties are more likely to be wealthier investors and institutional-level investors. 

Hybrid Options

There are also some hybrid options that fall in between these categories and can offer some of the best elements of both. For example townhouses, or duplexes, triplexes, and fourplexes. You can get more income-producing units on one lot, and have more exit options.

Summary

Both multifamily and single-family properties share some commonalities when it comes to the foundational benefits of real estate investment. They also have some noticeable differences, with MF, and hybrid options often providing better yields for those who have access to them.