Introduction
Real estate investing offers a plethora of opportunities, but understanding the nuances between different types of properties is crucial for success. In particular, the choice between Multifamily vs. Single-family investment brings many new investors to a screeching halt with no real guidance on what choice to make.
My goal is to clearly outline the main differences and provide a clearer path towards your success in real estate investing, whatever route you decide to take.
Before we dive into the characteristics below, it is best that we first establish the main difference between Multifamily and Single-family property. And no, Multifamily does not mean more than one family living in one house, although that may sound like a big party, you might have the local fire chief knocking at the door.
When referring to Multifamily property investments, we are talking about any building that has 2+ units that are separated to provide living quarters for individual people or families. You may have heard terms such as “two-flat” or “four-flat”, referring to 2 unit and 4-unit properties. Additionally, multifamily properties can be apartment buildings, where the occupants are strictly renters or condo buildings, where each unit is individually owned, however can be occupied by the owner or a tenant. It is important to note that condo buildings are subject to Homeowner Associations, which may prohibit a percentage or all the building units from being rented out.
Another important distinction to understand is the difference between “residential” and “commercial” multifamily properties. Residential multifamily refers to 2-4 units and commercial multifamily properties are buildings with 5 units and above. Number of units and cost are not the only differences that come with the distinction from “residential” to “commercial” multifamily. Typically, the designation from residential to commercial requires more upfront capital, stricter underwriting requirements and properties with 5+ units are subject to higher property tax based on valuation.
We are almost there!
Single-family property, in most cases these properties are your standard single-family homes with a white picket fence, intended for one family to live in at a time, that were bought up for cents on the dollar after the market crash in 2008. Imagine the realized gain in 2023! However, according to the U.S Census Bureau, single-family homes may be “fully detached, semi-detached, row houses and townhouses.” The given properties must be separated from other units by a ground-to-roof-wall, no units can be above or below each other. Furthermore, any of the units that are attached cannot share heating, cooling systems or any utilities whatsoever. Whew! Now that you are an expert on the unique characteristics of each property type let’s dive into the comparison.
Multifamily Properties
Resilience to Vacancies
Multifamily buildings are significantly less impacted by normal vacancy turnover, due to the multiple units in the building providing income to cover ongoing operating costs. For example, if a tenant moves out of a single-family home it quickly becomes 100% vacant, as opposed to 1 tenant moving out of a 100-unit building which is only 1% vacant. The rental income from the other tenants will cover necessary operating expenses and will not have a significant impact on the building’s bottom line.
Appreciation Potential
These investments can be forced to appreciate through operational cost-cutting, rent increases, and additional revenue streams. An increase in Net Operating Income (NOI) will yield an investor more cashflow and provide a healthy return on investment.
Management
While multifamily properties offer attractive returns, they require the management of multiple tenants which may require their own unique requests and management approaches. As the number of tenants increases so does the number of potential issues such as late or missed payments, evictions and potentially even frivolous lawsuits. To receive quotes from reputable management companies visit our management info page here.
Maintenance
A big advantage is that large maintenance requirements or improvements such as roof, utility or piping upgrades are done to one building at one location, as opposed to the inefficiency and potential higher costs that come with maintaining and upgrading multiple single-family homes across different neighborhoods or cities. Additionally, although the higher number of units the higher potential maintenance calls may arise, having all units under one roof provides an opportunity to create a system that is both effective and efficient.
Financing Requirements
Loans for multifamily properties with 5+ units are considered commercial loans, requiring a larger down payment (typically 20-25%) and shorter repayment schedules. However, 2-4 units may qualify for a conventional mortgage with a low downpayment (3.5-5%). How’s that sound for a first-time investment? For more information about financing visit our finance page here.
Inflation Resistance
Multifamily investments are considered inflation-resistant due to the consistent demand for rental housing, and the ability to raise rents to keep up with higher operating costs.
Single-Family Homes
Larger Inventory
About 67% of the housing stock in the United States is made up of single-family properties. There are more properties to choose from based on your financial situation, risk appetite and desired area. Making single-family properties potentially more attractive and attainable to first time investors.
Liquidity
Single-family properties are typically more liquid and have a much faster transaction time. This is primarily true due to a larger buyer pool, and lower barrier to entry into the single-family market. The larger buyer pool allows the single-family investor to expose the property to not only other investors but families seeking a place to call home.
Vacancy Impact
If a tenant moves out you are on the hook! Investors must be prepared with significant capital reserves to out weather any long-term vacancy and be able to cover ongoing expenses. Due to the single-family dwelling layout, there will be no additional tenants covering operating expenses until your vacant property becomes occupied again.
Economic Volatility
Single-family homes are more exposed during economic downturns. Most residential buyers that are buying or selling a single-family home involve emotions which may cause a market snowball effect. Fear, greed, emotional impulse and even “place attachment” from single-family homeowners may have a significant impact on the value of homes in a particular neighborhood, city or even region.
Capital Requirement & Return
While less capital is required upfront, single-family homes generally offer lower annual returns compared to multifamily properties. Investing a million dollars in a single-family house versus a 20-unit apartment building will typically provide you with a lower NOI, cash-on-cash return and equity appreciation over a given period.
Remote Investing
A growing trend among many new and experienced investors, out-of-state investing has become significantly more popular and much easier than before. This is thanks to property finding websites, online auctions, property and market intelligence data and social media believe it or not. The virtual platforms allow an investor to find a property, assemble a team, and execute. Single-family homes are typically much easier to locate, underwrite and inspect, making them a great remote investment target.
Conclusion
Not as straightforward as you thought, right? In real estate, nothing ever is. Both multifamily and single-family real estate investments have their pros and cons. Multifamily properties offer higher potential for forced appreciation, but they may require a more unique management approach and higher upfront costs. On the other hand, single-family homes offer potentially faster liquidity but may be more susceptible to economic downturns affected by impulsive and emotional buyers and sellers, and greater vacancy impact. Investors should carefully evaluate their investment goals, risk tolerance,
