The Truth about Single Family vs Multifamily

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Which one is the best?

We can finally settle the argument…

Multi family RE

Single-Family

Single-family is great because it is simple for investors who are just starting out. It’s one house with one roof, one water heater, one furnace – you get the point. Since it’s only one house it’s also relatively simple to manage. Another bonus of single-family is a greater amount of inventory (less today in most markets). This means there are a lot of opportunities to buy a cash flowing property.

There are quite a few strategies that work with single-family homes. You can flip them, wholesale them, or keep them as rentals. When they no longer make sense to hold you can sell your single-family home(s) with the greatest number of buyers.

Financing is simple. You can get up to 10 loans (currently) from Freddie/Fannie. This allows you to responsibly leverage (get debt) on properties at a relatively cheap cost. Have you seen rates today? They are less than 3%. Show me where you can find money that cheap?

The downside is scalability. Unless you’re paying cash, it can take 30 days or longer to close. Once you’re in the process of buying a house the banks don’t like you to move your money around. This can cause you to miss out on leverage or be tied up with the purchase process for thirty days or more.

You also risk having vacancy issues. If you have one house and can’t get a renter, you have a 100% vacancy rate. Though the cost will only be as much as your mortgage plus other expenses.

Multifamily

Multi-Family

I’m talking about 5 units and greater for multifamily. Properties that are 5 units and greater are considered commercial vice residential.

On the other hand, multi-family brings a great opportunity for scalability. The work to buy a 5-unit property isn’t much different than a 100-unit property. Imagine spending 3-5 months closing a deal on a 100-unit property. That scale can get you much closer to your goals a lot quicker.

Often times, apartments are cheaper per unit than single-family properties. This allows you to get your properties at a discount and make the same or more per unit. To make the deal even sweeter, you can add value by rehabbing each apartment and raising rents to market value. You can also buy the apartment with rents below market value and add value by raising the rents.

Imagine this:

You buy a single-family home that is renting for $800 yet the market value is $1000. If you raise the rent to market value you gain $200 in cash flow.

If you bought a 100-unit apartment complex with rents at $900 and the market value is $1000 you would increase the cash flow by $10,000.

The downside for multifamily is the inventory compared to single-family. There are more single-family homes than multi-family properties available. You might consider the price difference between a multifamily apartment and a single-family house a downside but I do not. You can raise money to fund most of the down payment. A lot of “normal” people like you and I are buying multifamily apartments.

A vacancy or two in multifamily barely raises an eyebrow. The cash flow from the other 98-99 units can cover the vacancy and still cash flow.

So, which one is better?

Both! The truth is, whether you’re starting out or you’re a seasoned pro – many of us are at different points in our investing career. Multifamily properties and single-family properties can require different strategies and different types of work. Over the past couple of years, I realized anyone with a will to win can invest in either.

I’m personally invested in residential single-family and residential multifamily (1-4 units). I’m also an investor in a larger commercial multi-family deal.

4 Responses

  1. Solid article and some very good points! My concern is personal liquidity and potentially being over-leveraged. Acquiring the “comfort” level of cash reserve to take the plunge is ongoing, but Im worried if I wait to long, ill either miss the property or the sale price will increase.

    1. That’s a great point. Each person will have different risk tolerance. For residential, you may look at what your biggest expenses could be (roof, A/C, septic, vacancy) and ensure you have that much saved. For commercial multifamily, good underwriting will include that in the capital raise upfront. Reserves are critical for commercial right now given the current sporadic economic environment we live in.

  2. Just heard your podcast on BP Rookie. I appreciate what your are doing here trying to help everyone you can. Good work! I’ll be following!

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