The Differences Between Investing in Single-family and Multifamily Properties

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Investing in real estate can be a great way to build wealth and generate passive income. However, when it comes to real estate investing, there are several options available including single-family and multifamily properties. While both types of properties can provide opportunities for investors, there are significant differences between them that can impact the investment strategy and potential returns.

In this blog post, we will explore the key differences between investing in single-family and multifamily properties. We will discuss whether investing in multifamily or investing in single-family houses best suits your investment goals and risk tolerance. Whether you are a seasoned investor or just starting, this post will provide you with valuable information to help you make informed investment decisions.

Scale

What’s clear is that multifamily properties are larger than single-family homes and have more units. This can offer several advantages including economies of scale, higher potential income, and lower risk. In terms of economies of scale, managing a larger property can be more cost-effective than managing multiple smaller properties. For example, you may be able to negotiate better rates with contractors for maintenance and repairs or save on administrative expenses by having a centralized management office. When it comes to potential income, with more units there is the opportunity to generate more rental income. For example, if you have a single-family home that generates $1500/mo then the most you can make in a year is $18,000 (12 mos. x $1500). Compare that to an 8-unit apartment building in which the average rent is $1200, the most income you’d be able to generate would be $115,200 ($1200 x 8 units x 12 mos.). The final point I want to make regarding scale is lowered risk. With multiple units generating income, the risk of vacancy or non-payment by a single tenant is lower than with a single-family home. A common misunderstanding is that single-family homes are safe but the truth of the matter is that if you invest in a single-family home and that tenant leaves then you generate no income. Compare that to the 8-unit we talked about earlier and you see that with one tenant gone you’d still be collecting income as the property would be 87.5% occupied. To recap, scale is one of the most obvious factors that differ between these two real estate asset classes and is the primary driver of the differences we will continue talking about throughout this post.

Cash Flow

Cash flow is the amount of money that is generated by an investment property after expenses such as mortgage payments, taxes, insurance, and maintenance are paid. Some differences in cash flow between single-family homes and multifamily properties have to do with the consistency of the cash flow and the initial investment. By consistency, what I mean is that because multifamily properties have more units, there is the potential to generate higher and more consistent cash flow as a result of there being multiple tenants. At the end of the day, investing in real estate (similar to any investment) is primarily about the income that flows into your pocket. Before investing in either asset class, ask yourself, ‘Do I want the safety of knowing that I have multiple tenants covering my cash flow, or do I want to rely on a single tenant?’ Before jumping into the other point I mentioned (initial investment), I want to tell a story. This story is set in 2018 when my dad asked me to help out with one of his single-family properties. He mentioned that he was having trouble with a tenant who had not paid for the past two months and thus he was losing money on the property. In order to serve the tenant an eviction notice, we had to go to the house multiple times since they would always pretend that they were not home when we came to the property. We knew when they worked, and it was obvious that they were home given all their cars were in the driveway. Long story short, we ended up serving the tenant an eviction notice, and it took months to get them out of the property, not to mention the headache of the court case that my dad had to go through. I mention this story because it illustrates the damage that one tenant can cause. Had the property been a multifamily, the same situation could have occurred with a single tenant, but the other tenants would have continued paying and thus the property would have continued generating income. Moving on, I want to touch on the topic of the initial investment required to buy a multifamily versus a single-family. While it is true that most of the time the initial investment to buy a multifamily property is more than that of a single-family, the reward is higher cash flow potential. As such, there is a direct relationship between the downpayment that one pays and the income potential of the property. Perhaps I’ve belabored the fact that multifamily properties can generate more cash flow, but at least I’ve gotten the point across.

Management

Managing a rental property requires time and effort and there are differences in managing single-family homes versus multifamily properties. Managing a multifamily property can be more complex than managing a single-family home because there are more units and tenants to deal with. With more tenants comes the potential for more problems to arise and keeping track of the monthly income, when tenants’ leases expire, and other factors is time-consuming. However, unlike single-family homes, with multifamily properties you can hire a property management company to take care of the day-to-day tasks so you can free up your time. That property management company would charge you a percentage of the rent collected and provide you with monthly reports as to how your property is performing. When working in the single-family space you can hire a property management company too, but that requires you to have a portfolio of single-family homes. Ultimately, single-family properties tend to be easier to manage while multifamily properties come with inherent complexity in terms of management due to the scale.

Financing

Financing options for single-family homes and multifamily properties can differ in several ways. Firstly, the down payment required for a multifamily property is typically higher than that of a single-family home. Typically the down payment for a stabilized multifamily asset is around 20-25% but can vary depending on a multitude of factors. In terms of interest rates, multifamily properties tend to have lower rates than those for single-family homes for various reasons. Lenders tend to view multifamily properties as less risky because they have multiple units and tenants, which means that there is a lower risk of income loss if one tenant moves out or stops paying rent. In addition, because multifamily properties have more rental income potential, there is a greater likelihood that the borrower will be able to repay the loan which can result in lower interest rates. While multifamily investors tend to get more favorable financing terms compared to single-family investors, lenders may be more cautious about financing a property with multiple units and tenants. More so, multifamily properties may require more complex financial analysis and underwriting than single-family homes as lenders will need to evaluate the income potential of the property as a whole, rather than just the income from one unit. These are some of the financing factors to think about when weighing both real estate asset classes.

Conclusion

When all is said and done, the decision to invest in single-family homes or multifamily properties will depend on your investment goals, risk tolerance, and personal preferences. To say that one asset class is clearly better than the other would completely ignore the fact that it depends on an investor’s circumstances as to which is a better investment choice. Something to keep in mind is that if you invest alone then you will have 100% of the headaches. Perhaps you may want to partner with another investor so as to leverage your experience and capital. Nevertheless, I trust that this blog post has helped clarify the differences between single-family and multifamily investing.

If you have any questions regarding the terms and concepts in this post or previous ones, don’t hesitate to reach out to either me (tedi.nati@jpacq.com) or someone on our team so we can help explain what is causing the confusion. If you’re interested in investing with us at JP Acquisitions, you can contact us via email (contact@jpacq.com), LinkedIn, Instagram, or our investor portal to set up a meeting.

As always, I hope you enjoyed reading this post as much as I have writing it. Best of luck!

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About the Author

Make sure to always do your own research before making any final decisions on buying/investing real estate, stocks, or other securities. I am not a CPA, attorney, insurance, or financial adviser and the information in this blog post shall not be construed as tax, legal, insurance, construction, engineering, health and safety, electrical or financial advice. If stocks or companies are mentioned, I sometimes have an ownership interest in them – DO NOT make buying or selling decisions based on my posts alone. If you need such advice, please contact a qualified CPA, attorney, insurance agent, contractor/electrician/engineer/etc. or financial adviser.