Investing in Single-Families vs Multi-Families

Multi-FamilyOne of the questions RCN receives most often from people interested in investing is: “Should I buy numerous single-family investment properties or a few larger multi-unit properties?

There are pros and cons to each option, so the best response is usually “It depends.” Let me explain why with a side by side comparison.

For this example, we’re going to assume the total portfolio is the same number of units.

Benefits of both:
Single-Family Houses Multi-Family Properties
  •        Easier to begin investing
  •        Easier to manage
  •        Easier to build slowly
  •        More consistent cash flow
  •        Easier to slightly decrease or increase your portfolio
  •         Growth is much faster
  •        More to choose from when looking for new investments
  •        Easier to sell than your entire SFR portfolio
  •        More financing options
  •        Income based valuations protect you from drastic market fluctuations

Single-Family Residences (SFRs):

Easier to begin investing

Saving up for a down payment on an investment property may not be easy no matter what the size, but for most people, it’s faster to save up enough for the down payment on a single-family property.  Higher inventory of single-family houses in most markets also contributes to the ease.

 

Easier to build slowly

If you’re the kind of investor who is looking to steadily add rental units to your portfolio without giving up your day job, slowly building a portfolio of single-family houses might be easier.

 

Easier to slightly decrease your portfolio

If you are looking to increase liquidity, it’s easier to get rid of a few units to open up the potential for new opportunities. Owning 20 SFRs and selling 2 to access additional capital may be easier than taking cash out of your 20-unit property.

 

More choices when looking for new investments

According to The National Multi-Family Housing Council, there are 684,000, 5+ unit properties in the US.

There are 56.3 million single-family homes and 2.6M 2-4 family houses.

A combined 58.9M 1-4 family homes and 684,000 5+ unit properties mean that there are 82 times more options for 1-4 family properties than 5+ unit properties.  (https://www.nmhc.org/research-insight/quick-facts-figures/quick-facts-apartment-stock/)

 

Stronger financing options

Higher leverage and lower interest rates are the expectation with single-family houses, and it usually holds true. Depending on your scenario and borrower profile, you may have the option to use conventional financing, hard money/private money, or cash for your purchase.

 

Multi-Family Properties:

Easier to manage

Let’s use an example of 30 units. Having 30 individual single-family houses versus having a 30-unit building is a drastically different approach to property management. With a 30-unit property, you can have more dedicated resources for that one building. Your portfolio covers a smaller area, so you don’t have to worry about multiple issues in different towns or even different states.

 

More consistent cash flow

When you have a vacancy in a single-family property, you have a non-performing asset. The mortgage payments steadily drain your cash reserves. When you have a vacant unit in a multi-family property, you can still break even or potentially be cash flow positive. This means minor fluctuations like tenants leaving affect you less with a multi than with SFRs.

 

Faster growth 

Adding one 10-unit multi-family is less work for you than adding 10 individual single-family houses. Less paperwork, less time, and less effort. It may be tougher to find the 10-unit property, but once you do, it’s one deal rather than 10.

 

Easier to sell than your entire SFR portfolio

Selling off larger parts of your portfolio in order to increase your liquidity is easier with multi-family housing. This should be true even at lower levels. A 5-unit property should be easier to sell than 5 single-family houses. The disparity only grows larger as the number of units in each portfolio grows larger.

 

Income-based valuations protect you from drastic market fluctuations

Commercial properties are usually valued using an income-based approach. This means the property’s value is tied to its rental income, not to how similar properties in the area are selling.

 

One property, one loan:

Less paperwork, less to remember, less to keep track of. Having all your units within one, or a few properties, may help make it easier for you to keep organized.

 

There is no right answer as to whether investing in single-family properties or multi-family properties is better. However, making an informed decision can help an investor determine which property type to focus on. Use the comparison above to figure out which strategy appeals more to you and let us know what you think!

Chat with the RCN Capital Sales Team!