What is the main difference between single family and multifamily real estate?
Many investors disagree over which real estate vehicle is the ideal option for building wealth in real estate: multifamily or single-family?
There are benefits and drawbacks of both. Many investors have built massive amounts of wealth in the single family space and in multifamily. While many investors start in the single family space, it seems that the natural path for an investor who wants to grow and scale is to get into larger assets like apartments.
Single family investing might be a good option for a new active investor, because of the lower barrier to entry. Multifamily investing is more challenging to break into, and is more complex than single family.
In this article, we’ll be making a case for why multifamily investing is the superior option. But, we’ll also dive into the complexity of the issue, detailing the advantages and disadvantages of both options so you can make the right decision for your personal situation.
Pros of Single Family
Lower barrier to entry
Single family properties are more accessible than most multifamily investments. This is due to multiple reasons. Single family properties are less expensive than multifamily properties. First time investors are more likely to be able to afford buying a $100,000 property than a $2 million+ apartment complex.
It’s also easier for an investor to qualify for a mortgage on a single family property than it is to take out a loan to buy a large multifamily property. There’s no need for a rent roll or strict liquidity requirements when buying a single family home as there are with multifamily investing.
Buying a single family home is also more straightforward than buying a multifamily property. While a single family transaction typically takes 30-60 days, a multifamily purchase can take anywhere from 30-90 days. This is because there are less moving parts and complexity. This also makes it easier to sell single family properties on the backend than it is to sell a multifamily property.
Single family properties usually have lower down payments, and cheaper debt.
Easier to Diversify
It’s easier to diversify with single family properties because they are cheaper to get into, and there are more single family properties than multifamily properties in general. Of the total 138 million homes in the US in 2018, according to the American Community Survey, 65% were single family homes, 27% were multifamily units, and 6% were manufactured homes.
Also, finding a multifamily deal takes more time, relationships, and effort. As a result, you can afford more single family houses, and it’s easier to find more single family deals than it is to find multifamily deals.
You can easily buy single-family properties in multiple different markets. Whereas with multifamily, your portfolio is more concentrated. Instead of having 100 single-family properties in ten different markets, you might have two 50 unit apartment complexes, or one 100 unit apartment complex.
Lower tenant turnover rate
Since single family properties typically only have one or two tenants, investors are more likely to have less tenant turnovers than at a multifamily property. The fewer units a single family investor needs to fill, the more attention and effort they can put into the process of finding and qualifying the best tenants. This means they can spend less time cleaning out their unit, repairing damages, marketing, and pre-screening new tenants.
There is a downside to having less tenants, which we’ll discuss later.
More liquid
Single-family investing is also more liquid than multifamily. There are more transactions occurring in the single-family marketplace, so it’s easier to sell a property in a shorter period of time.
Cons of Single Family
Harder to scale
Scaling a single-family portfolio is much harder than multifamily. For example, it would be much more difficult and time consuming to buy 100 single-family properties than it would be to buy a single 100-unit apartment complex. The process of finding 100 single family properties that meet your investment criteria, and going through the negotiation process, and paying legal fees on 100 different properties would take a lot of time and energy. Buying a 100-unit apartment complex isn’t easy, but it’d be more straightforward than building a 100-single-family property portfolio. Also, you can usually only take out a certain number of mortgages at once. This can severely limit how fast you can grow your single family portfolio.
Hard to Find Quality Vendors
Scaling in the single-family space is also more challenging because it’s harder to find good property management companies. When you do find a good one, single family property managers will charge a higher percentage of the property’s monthly revenue than in the multifamily space. This can eat into your cash flow.
Risk of Tenants
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. It’s also important to note the loss in rental income you endure while the unit sits vacant.
The time it takes to clean out a unit, repair any damages, market for a new tenant, show the unit, vet the tenant, and move them in takes time and resources.
You are still expected to make any payments on the mortgage even if you don’t have a paying tenant in the property. So, all it takes is for your single tenant to stop performing, and the property will stop cash flowing. This is much more risky than having multiple tenants in a multifamily property paying rent. For example, let’s say you have a 10 unit property. If one tenant stops paying, you still have nine other tenants paying rent. This helps to distribute the risk among multiple tenants.
Pros of Multifamily
Economies of Scale
Multifamily investing allows you to scale your real estate business with efficiency. It is hard to find good property managers in the single family space because there isn’t as much cash flow available. With multifamily properties, you can afford to pay a quality manager.
The benefit of having multiple units at the same property is that the cost per tenant of maintaining a multifamily property is usually much lower than the cost for a single family property.
As you scale up into larger multifamily properties, you can afford to pay an onsite property manager. If the property is large enough, like 80+ units, you can also bring on an internal maintenance team.
Instead of having to call a third party contractor when something breaks, you can have your internal maintenance team handle it. This increases overall profit and efficiency because it decreases the operational hassle of having to deal with a vendor rather than someone who is your W-2 employee.
Tax advantages
Multifamily investors typically enjoy favorable tax benefits that are superior to the ones offered in single family investing. For example, multifamily property owners can utilize expense depreciation to decrease their tax liability.
They can also conduct a cost segregation study that allows them to accelerate depreciation at their property. This allows the multifamily property owner to utilize accelerated depreciation deductions. As a result, cash flow increases and they have to pay less federal and state income taxes on the rental income they receive from the property.
Higher and consistent cash flow
Multifamily properties generate more cash flow per unit than single family properties do.
Multifamily properties offer passive investors consistent cash flow. Passive investors are considered limited partners in the business, but they still benefit from the steady profits the property produces. The active investors make sure the property is running smoothly, and the business plan is being implemented correctly in order to ensure that cash flow meets or surpasses projections. The costs of running the property, including the property management expenses, renovation costs, and taxes, are deducted from the total income the property produces. Since a multifamily property’s expenses are covered by the rental income it collects, the cash flow is stable. The total profit is distributed among the investors in the deal according to the splits detailed in the Private Placement Memorandum (PPM).
A multifamily property can still cash flow with vacancy rates as high as 20%, while a single family property will not cash flow as soon as the one current tenant stops paying rent.
Value Determined Based on Property Income
While single family property values are determined based on external appraisers and the sale price of comparable properties in the area, multifamily properties are valued based on the income the property generates. You can’t control the supply and demand forces that determine the value of a single family property. By improving a multifamily property, you can force appreciation.
The cap rate of a multifamily property (Net Operating Income divided by the sales price) is used to evaluate how much the property is worth based on cash flow. The process is similar to how any business is valued. This allows multifamily investors to make more profit. By making a small operational or physical improvement to the property, the investor can significantly increase the overall value of the property. Value add investors can add a new grilling area, or can build new units to drastically increase the overall value of the property. When you add new features to a single family property, the impact isn’t as significant as it is with a multifamily property.
Easier to Scale
Multifamily investors can grow their portfolios at a faster rate than single-family investors. As we mentioned earlier, buying 100 single-family homes will take much longer than buying a single 100 unit apartment complex.
Investing in multifamily real estate allows investors to grow their portfolios more quickly than with single-family homes. Buying and maintaining 20 single-family houses would be less efficient and profitable than acquiring and operating one 20-unit property. Would you rather have 20 different mortgages and investment strategies or one?
Cons of Multifamily
Higher barrier to entry
Multifamily properties are more difficult to buy and operate. This makes it more challenging to find a buyer when you’re ready to sell a multifamily property.
More risk
The bigger the deal, the more money involved. This simply means that the stakes are higher. But, this also means that the potential for profits is much greater. Multifamily investments usually have general partnership teams in charge with extensive experience and knowledge. Newer investors may want to invest passively in a multifamily syndication before taking down their first multifamily deal on their own in order to learn the process.
Conclusion
There are many differences between single-family and multifamily investing. There are benefits and downsides to both options. Investing in a single family property will give you all the control. Investing in an apartment syndication won’t, unless you do the deal by yourself.
When you invest with a general partnership team, you have almost no control. However, you can receive all of the benefits of a cash flowing multifamily property without the headaches or hassle involved in managing it.
This is why many people prefer to be passive investors in multifamily real estate. This way, they don’t have to take an active role in the deal.
Newer investors have more access to single family investment opportunities, there is usually a smaller and limited cash flow potential.
Multifamily real estate offers investors more opportunity to increase cash flow and increase the value of the property.
At the end of the day, the choice is yours. Whether it’s single-family investing or multifamily investing, the right investment strategy for you is the one that best aligns with your long term investment and lifestyle goals.