Key takeaways
- Multifamily rental assets have greater income potential and are less vulnerable to vacancies than single-family homes.
- Managing a single-family home is much easier than managing a multifamily dwelling.
- Financing for a multifamily property with five or more units is more difficult to get, requires bigger down payments, and often requires shorter repayment schedules.
- The demand for multifamily rentals has slowed down since the pandemic, while the demand for single-family rentals has risen.
- The value of single-family homes appreciates faster; however, you can forcibly appreciate the value of a multifamily property by increasing its income and lowering operating expenses.
Investing in real estate can be a great way to build wealth over time, but choosing the right type of property can be challenging. Real estate investors are often torn between investing in single or multifamily homes. While both offer unique advantages and disadvantages, it can be difficult to determine which is the better investment.
In this blog post, we will explore the differences between single-family and multifamily homes as investment properties and help you determine which option might be best for your investment goals.
Single-family homes vs. multifamily homes
The main difference between single-family and multifamily homes is their number of dwelling units. Single-family homes are designed for a single household, whereas multifamily homes can accommodate multiple households within the same building or on the same lot.
Let’s compare both types of investment properties in terms of their income potential, ease of property management, financing, and ongoing maintenance cost.
Table comparison of single vs. multifamily home
Income potential
Recent data shows that renting a single-family home costs an average of $2,018 per month, while a typical apartment rents for about $1,659. However, investing in multifamily buildings provides the opportunity to rent out more units on the same land area compared to a single-family home, resulting in increased rental income.
Furthermore, owning multifamily investment property reduces vulnerability to vacancies. In the event that a renter decides to leave, you will still have other renters generating income in the building. In contrast, with a single-family home, your rental income depends on a single renter. If they leave, your occupancy rate drops to 0%, and you risk going for months without any rental income.
Therefore, unless you own an equal number of single-family homes per unit of multifamily homes, investing in multifamily properties has the potential for higher rental income and cash flow than investing in single-family homes.
Rental demand
Since the beginning of the COVID-19 pandemic, there has been a notable shift in the housing market, with more people showing an interest in single-family rentals. According to the Joint Center for Housing Studies, one of the primary reasons for this trend is the demand for larger living spaces amongst younger families. In addition, home prices have risen considerably over the last few years, making homeownership more difficult for moderate-income families.
Meanwhile, multifamily properties are showing signs of slowing down. According to Fannie Mae’s 2023 market commentary, there is an expected increase in the national vacancy rate for multifamily rentals, which could extend through 2024. This trend could be attributed to various factors, including an oversupply of new rental units, a preference for larger living spaces, and the economic impacts of the pandemic.
Capital appreciation
Single-family properties have historically appreciated much faster than other types of properties. This is partly due to the high demand for single-family homes across the US. Furthermore, Zillow projects that single-family home values will continue to grow by another 14.3%.
Multifamily properties, on the other hand, are valued based on their net operating income. One advantage of multifamily properties, however, is that you can proactively force its appreciation by adding streams of income, reducing operational costs, or doing both.
Liquidity
Single-family homes are generally considered to be more liquid than multifamily properties. This is due to their lower cost, high demand, and access to a bigger pool of buyers (investors and homebuyers).
On average, houses stay on the market for only 25 days, plus a closing period of 30-45 days. Meanwhile, multifamily properties could stay on the market for several years due to their high cost, complex buying process, and specificity of buyers.
Property management
Single-family homes are generally considered easier to manage than multifamily homes. Managing a single-family home involves dealing with a single renter in a single property, whereas managing a multifamily property entails dealing with several renters, collecting more rent payments, maintaining multiple units, and addressing more complaints.
In addition, single-family homes typically have lower turnover rates. Renters in single-family homes tend to stay an average of three years, while apartment renters stay for roughly half as long. As a result, you’ll spend less time marketing your rental, screening applicants, and onboarding residents with single-family homes.
The challenge is owning multiple single-family homes in different locations, as it makes it more difficult to attend to work orders, find vendors, and care for your property. In this case, it might be necessary to hire a property management company, like Poplar Homes, that can efficiently manage properties even across different locations and streamline the rent collection, accounting, and maintenance process.
Ongoing maintenance
Multifamily properties tend to have higher maintenance frequency and costs compared to single-family properties. This is because multifamily properties have more units, shared spaces, and common areas that require regular maintenance, repairs, and upkeep.
For example, multifamily properties may require more frequent cleaning and maintenance of shared hallways, stairways, elevators, parking lots, and landscaping, which may require you to hire full-time employees to run the building. In addition, multifamily properties may require more frequent repairs and replacements of shared appliances, HVAC systems, plumbing, and electrical systems.
On the other hand, single-family properties may require less maintenance, as most of the cleaning is done by the renter. However, single-family properties may have higher repair costs per unit, such as replacing a roof or repairing a driveway.
Financing
Single-family homes typically have lower purchase prices and require a smaller down payment. Financing a residential property is also easier to get, making them more accessible to first-time investors or investors with limited financial resources.
Multifamily properties with five or more units, however, are considered commercial real estate. Thus, they require a commercial loan which is more difficult to get, requires bigger down payments, and often requires shorter repayment schedules.
Moreover, mortgage payments on single-family rentals are based on the underlying value of the property, whereas commercial loans base mortgage payments on the income it generates, making the whole process more complex.
Advantages and disadvantages of single-family investments
Advantages
- Easier to manage – fewer responsibilities, fewer residents to deal with, and a lower turnover rate.
- Growing rental demand – increasing home prices are making homeownership harder, thus, increasing the demand for single-family rentals.
- More liquid – access to a larger pool of buyers.
- Lower upfront cost – generally cheaper than multifamily properties making it accessible to first-time investors.
- Easier to finance – can be financed as residential property, which only requires a 25% down payment.
Disadvantages
- Slower portfolio growth – scaling rental properties is harder.
- Lower income potential – fewer rental units per square foot.
- More vulnerable to vacancy – one property only has one renter. Thus, if the renter leaves, income vanishes.
Advantages and disadvantages of multifamily investments
Advantages
- Higher and more stable cash flow – more units rented per square foot means you are less vulnerable to vacancies.
- Cheaper cost per unit – since you have one building with multiple units, maintenance is cheaper per unit.
- Faster portfolio growth – investing in a multi-unit property allows you to grow your portfolio exponentially.
- Force appreciation – you can appreciate your property by adding income streams, reducing operational costs, or doing both.
Disadvantages
- Harder to manage – you have more responsibilities ranging from the upkeep of shared spaces and maintenance of individual units to collecting rent and imposing your house rules.
- Difficult to finance – properties with more than five units are considered commercial properties and require a commercial loan.
- Less liquid – multifamily homes are harder to sell because of their higher cost and limited pool of buyers.
- High upfront cost – multifamily properties generally cost more than single-family homes.
Which type of property should I invest in?
Both types of investment offer unique advantages and disadvantages. Thus, deciding what to invest in depends on your investment goals.
Are you looking to maximize your rental income, or are you looking to earn passive income while you’re working a full-time job? If your goal is the former, investing in multifamily properties will give you a higher cash-on-cash return and allow you to scale much faster. If it’s the latter, then single-family homes are easier to manage.
Moreover, don’t limit yourself to single-family homes and large apartment buildings. Duplex, triplex, and fourplex investment options can give you the best of both worlds, like increased cash flow and income stability, without the hassle of financing through commercial loans and multi-unit maintenance.
If you’re a first-time investor, consider investing in a single-family home first, then slowly work up to a fourplex or an apartment building.
Up next: Building a rental property portfolio: The ultimate guide
Final Thoughts
Investing in real estate can be challenging as choosing between single-family and multifamily homes poses a dilemma for investors. While both offer unique advantages, it can be difficult to determine which is the better investment. Single-family homes are easier to manage and acquire but have limited cash flow. In contrast, multifamily properties offer better cash-on-cash returns but are generally more expensive and harder to acquire.
Ultimately, deciding what type of property to invest in depends on your investment goals. Moreover, don’t limit yourself to single-family homes and large apartment buildings. Duplexes, triplexes, and fourplexes are all great in-between options that can help you grow your investment portfolio without taking on too much responsibility.
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