Many of our readers are constantly asking which is the better investment:
Single family homes or multi-family homes and apartment buildings?
For the purposes of this article, we’ll consider either investment (SFH or MFH) to be a standard long-term buy and hold rental property (that means, not a flip, not a Lease to Own, not wholesaling, short-selling, day-trading or any other real estate strategy out there!).
So for this article, SFH is defined as a property (can be a detached house, condo, townhouse, rowhouse, etc.) that has only 1 unit and thus only 1 family living in it. A MFH, for the purposes of this article, is defined as any property that has more than 1 unit/family living in it. Thus, it could be a house with a basement suite (2 units), a duplex (2 units), a triplex (3 units), but we generally think of it in terms of apartment buildings with multiple units under one roof….Usually 5 or more.
Disadvantages of Investing in Single Family Homes
- The biggest disadvantage as an Investor is they rarely cashflow as well as a multi-family home
- Can be “riskier” as there is only 1 tenant to pay the rent. If they vacate (and you can’t immediately place a new tenant), who pays the mortgage, bills, utilities, etc? You do! The MFH has more than 1 tenant so they at least continue to collect some rent to offset their costs.
- Tend to have a smaller pool of renters because SFH tend to have higher rents than homes with multi-units. Thus, it may be more difficult to place a good tenant in a SFH because they tend to be more expensive.
- No economies of scale with a SFH. If you or your PM are managing it, there is just the 1 house/unit/tenant. Most PM’s will offer discounts on a per unit basis if it’s a MFH, these discounts won’t apply on SFH. The same goes for doing repairs and maintenance, you may get a cheaper per unit rate if you are replacing all the windows or locks on a MFH than on, for example 3 SFH.
- SFH are often slightly less conveniently located than MFH which again may hurt your chances to find tenants. Thus, SFH are usually slightly further away from main roads and public transportation, retail shops, offices, and other places that your tenant may want to be close to. This is because MFH are generally built in higher density areas. Higher density areas are built around shopping, stores, offices, etc.
Contrast these with the advantages of Multi-Family as an Investment:
Advantages of Buying Multi-Family Homes
- Potential to cashflow better because there are many more units purchased for a slightly lower price per unit – typically.
- More than 1 rent to help cover your operating costs – if one unit is vacant there are other units bringing in revenue that will help you out.
- The ability to force appreciation through increased income…This can be done through a variety of differnt ways, to be discussed in more detain in another post
- Often a broader range of possible tenants to choose from as the per unit rental cost is usually less than a SFH
- If 1 unit becomes vacant, you can work on it (paint, put in new floors, etc.) but still be collecting rent from your other units/tenants
- Economies of scale: for instance, your PM will likely charge you less (as a percentage of the rent) on a 2 or 3 or more MFH than he/she will on a SFH. Furthermore, your utility costs will likely not be 3 times the amount (if it’s a 3 unit MFH) even though there are 3 tenants living there.
- On a per unit basis are less expensive than SFH
- Generally, your rent to price ratio is higher on MFH than on SFH (this can often equate to more cashflow)
Yes, we like Apartment for the reasons listed above. Are we a little biassed? Yes maybe…but when you consider the cash flow and ability force appreciation…Apartments will always win out in our mind…
Give us a call at 510-863-1447 to discuss apartment building investing in more detail…