Is It Better to Invest in Single Family or Multi Family Homes?

Andrew J. Matella | 10/25/2018 | FixFlipRepeat

Which is Better to Invest In? Single Family or Multi-Family?

While it is a common question, the answer is not necessarily cut and dry.

Newsflash: Neither dwelling type is necessarily “better” than the other.

Most buy-and-hold investors tend to think a portfolio of multi-family dwellings are better to have as an investment over single family. The reason being is that they’ve been sold on the idea of economies of scale and efficiency of all units being under one roof. This is absolutely true, but before writing off single family dwellings as a less than favorable investment there are some things you need to consider first.

The principal benefits of multi family over single-family are:

  1. Economies of scale. With multifamily you’ve got all tenants under one building and one roof, rather than 5 roofs equating to a more efficient spread of costs relative to income.

  2. Diversification. If you own a 5 unit complex, one out of 5 units being vacant won’t kill you- but a vacancy in a single family unit equates to 100% vacancy.

  3. Easier to Manage: Owning one 5 unit building is one job site. To get the same level of income with single family residences, you’d have to invest in 5 houses. That would be 5 job sites. Five sites are a lot more difficult to manage than one. Compound this with distance if you live far from your investment properties and you have a scenario requiring a lot of your mileage and time dedication.

While multifamily has great benefits I personally still find myself gravitating toward and investing in single family homes. This is not because Single Family better than Multi-Family. It’s mainly because there aren’t a lot of Multifamily (here I’ll characterize that as 2 units or greater) where I live. But there are a few other factors that play into my decision. Here they are.

  1. Theres an abundance of single family. Currently there over 150 single family homes active on the market where I live. My search criteria limits to block structures with a purchase price of <$225,000. There’s less than 5 duplexes, and even less with three dwellings or greater. Out of the active listings in both categories, maybe 1–3% have potential to be a good deal. So from there being a lot more single family houses to choose from you can see theres more potential of finding good deal out of sheer number of houses available.

  2. Owners of multifamily units are more sophisticated at pricing than single family. Example. Most multifamily unit owners are investors. Many very seasoned. It’s pretty widely acknowledged that duplexes, quadplexes, etc are valued on income valuation, or cap rate. Basically the price is a function of how much income the property currently or potentially generates in relation to the “cap rate”- the rate of return an investor can expect to receive from the property after expenses. It’s pretty cut and dry, and there’s not much opportunity for value add in the market we’re in now because buyers are willing to accept cap rates as low as 5%.

  3. More opportunity for value add with single family. When you buy a single-family house and eventually try to resell there are a lot more different markets and end-users you can target. For example, a three bedroom two bathroom house can be sold as a turnkey unit to an investor, but it can just as well be sold to a family at retail prices. On the other hand, with multi family your market is pretty much limited to investors. In fact the higher units go, the more niche your market becomes. This is not a bad thing per se, just know the price they’ll pay is the cap rate. Cut and dry.

    1. For a single family, three bedroom / two bathroom house there is a substantially bigger market and is a lot easier to sell. And you can sell at a bigger premium assuming you’ve done improvements relative to houses in the general area (comps)

  4. Better exit-strategy with single family. Related to the previous point but is so important it needs to stand on its own. With single-family your exit opportunities are more abundant and easier than multifamily. Selling an expensive multi family apartment complex is going to be limited to people with strong credit, good finances, and essentially investors. It is a lot easier to find a buyer for a single-family house than it is for large multi family units in most markets. There are a lot more “no money down” financing opportunities available for single family home buyers with limited cash for single family as well think FHA, VA and USDA loans. That by the way, opens your marketability quite a bit.

These are just some of the guidelines I abide by. You can find a lot of great deals on single-family houses with good cash-on-cash return just as you can find from multi-family.

Future end game and a bigger market to sell to tilt the scale for me. I always like to leave myself with options if I ever need to sell the property down the line. In case shit hits the fan and I want out I have more “outs” with a single family residence. And shit does tend to hit the fan every once in a while. Let’s hope that won’t happen soon.