Rental Property Investing: Single-Family vs. Multifamily
Rental Property Analysis
Are you looking to get started in real estate investing but have no idea what type of property to invest in?
Your choice of investment property depends on your current situation, goals, risk tolerance, and overall preference. If you can’t decide between a single-family or multifamily rental property, it’s best to weigh the pros and cons of each. Here’s a breakdown of both property types to help you decide which is best for your goals as an investor.
A Single-Family rental property is a residential property with only one unit. This often means that there is only one set of people residing in the single unit. The most common example of a single-family property is a house, typically found in suburban areas.
Multifamily rental properties consist of multiple units within the property, ranging anywhere from two units to hundreds of units. In this article, we’ll focus on residential multifamily properties that contain between two to four units. This means that there are two to four sets of people living within the property, and the building type can range from a duplex, triplex, or fourplex.
Single-family Rental Property
Reasons to choose single-family property
Less capital needed to start. When investing in a particular area, you may find the capital requirements are less for a single-family property compared to multifamily.Being able to acquire a property for less up-front cost is an attractive option for those looking to get started in real estate investing but have limited funds.
Lower tenant turnover. Compared to multifamily renters, single-family property renters are less likely to move which leads to lower turnover and decreased vacancies. Single-family tenants tend to form emotional attachments to their homes, neighbors, and all the perks their neighborhood has to offer, which provides stronger incentives to stay.
Increasing demand. Over the past year, 50,000 new single-family homes were added to the rental market, increasing the average by 66% of new homes built in the past decade (According to Roofstock).
More opportunities to sell. Due to the factors mentioned above - such as the increasing demand, lower barrier to entry, and lower tenant turnovers - single-family homes have greater resale opportunities than multifamily properties. Since home buyers are often interested in purchasing single-family homes as their primary residence, they compete with the many types of real estate investors who are also interested in purchasing single-family properties.
Cautions with single-family properties
Less monthly cash flow. Since there’s only one set of tenants residing in a single-family property, there’s limited cash flow opportunities in terms of rental income compared to renting out a multifamily property to multiple sets of tenants.
Costly vacancies. If a tenant can’t pay rent on time or if there is a vacancy, there’s the possibility of having to pay the full mortgage out-of-pocket as the owner of a single-family home.
Harder to scale your portfolio. If you wanted to have an investment portfolio of at least 10 units, you would have to invest in 10 separate single-family properties. Alternatively, if you were investing in multifamily properties, you would only have to invest in either 5 duplexes, 4 triplexes, or 3 fourplexes.
Multifamily Rental Property
Reasons to choose multifamily properties
Scale your portfolio faster. Investing in multifamily properties allows you to build a sizable portfolio, as discussed above. Investing in 20 units by purchasing 5 fourplexes will generally take less resources and time than it would to invest in 20 separate single-family homes.
Achieve economies of scale. You’ll benefit from economies of scale when investing in multifamily units. Any updates made to a building (fixing the roof, updating the exterior, adding a pool to the yard, etc.) will increase the value of multiple units, as opposed to just one. Additionally, management fees are typically lower for multifamily properties, and contractors will offer a better per-unit rate than if they were to do the same projects on a single-family home.
More monthly income. When investing in a certain location, a multifamily property may yield more rental income compared to a single-family rental, since you’ll be collecting rent from multiple groups of tenants as opposed to only one. If one unit is vacant, you’ll still be able to collect rent from the other set of tenants within the other units.
Reduce your own housing cost. Another advantage of investing in multifamily properties is that you can live in one of the units while renting out the others out to tenants. Your tenants will help pay down the mortgage, reducing your personal housing cost or even allowing you to live rent-free in some cases. Additionally, you’ll save money by not having to take out a second mortgage on a primary residence.
Cautions with multifamily properties
Tenant screening on a larger scale. When you have more units to fill, you’ll have more tenants to screen. If you aren’t thorough in your screening process and don’t establish the right systems to efficiently screen, this could lead to higher tenant turnover and increased vacancy rates. A bad tenant can be costly in the long run.
Financing can be difficult. Financing a multifamily property can be challenging for beginners starting out in real estate investing. You will typically need a higher down payment and higher cash reserves than you would for a single-family rental.
Self-managing can be challenging. With more units comes more tenants, and more tenants means more maintenance requests, problem solving, and other time-consuming activities. Multifamily rentals will overall require more work to maintain and therefore self-managing can be challenging. You may want to consider hiring a property management company when you invest in multifamily properties.
Harder to sell eventually. As we mentioned earlier, there’s a larger pool of potential buyers for single-family properties. Typically, home buyers aren’t interested in purchasing multifamily properties as their primary residence, which limits the buyers’ market to only other real estate investors.
Single-family vs. Multifamily Property
What Makes Sense for You?
The type of investment property that you decide on is ultimately up to you. It’s important to make sure your decision aligns with your goals as an investor. To gain a better understanding of which investments are best suit for you, we recommend speaking to professionals, such as financial advisors and tax experts.
If you’re just starting out as a real estate investor and more risk averse, then single-family homes may be a better option. If you have a higher tolerance for risk and want to scale your portfolio fast while collecting as much income as possible, then multifamily properties might be better suited for you. Both options are great for a first-time investor, and down the road it would be wise to diversify your portfolio by investing in both.
This article was written by the Rentometer Content Team. The Rentometer Blog features fresh takes and insights on rental housing topics, services, and technology.