Should You Invest in a Single or Multi-Family Rental Property?

If you’re a rental property investor looking to make your first property purchase, you may be wondering if you should invest in a single-family home or a multi-family property. Each type of property brings a unique set of challenges to the equation and can provide benefits in your pocketbook and portfolio. There is no correct answer, per se, but most investors usually see more benefits to one type of property than the other, depending on their needs and unique situations. With this in mind, let’s take a look at some of the pros and cons associated with single and multi-family rentals.

1. Major Repairs

Let’s start by taking a look at the major repairs that will become necessary at some point, assuming you own your property long enough (or purchase a property that’s already on its last leg in terms of maintenance and upkeep).

The most significant benefit in this category goes to single-family homes because you only have one roof, one HVAC system, one electrical system, and one plumbing system to deal with. Each of these items alone can be extremely expensive, and if you have multiple properties, or if you’ve purchased a multi-family unit, you may find yourself dealing with numerous expenses simultaneously.

It’s worth mentioning, too, that some multi-family homes started as single-family houses. Sometimes, these properties can have pipework and electrical facilities that were pieced together in less-than-optimal conditions, which can also cost you a lot of money down the road. If you’re looking into a multi-family property, be sure an inspector (or two!) looks through the entire house or complex with a fine-toothed comb. The last thing you want to discover after you purchase a property is that things aren’t up to code or will cost you a fortune to separate into properly working parts for each unit within your property.

2. Cash Flow

When it comes to cash flow, multi-family properties take the top spot. Why? Because, in single-family homes, you’re out income if a renter decides to leave, has to be evicted, or their lease ends before you have another tenant. While you’re busy dealing with cleaning, advertising, and maybe dealing with court (in the case of evictions), you’re losing out on 100% of your income. With multi-family properties, you still have money coming in from other units, even if one of them becomes vacant. While you’re not making optimal cash flow when your units aren’t at 100% occupancy, you’re still generating revenue, which can help offset the vacancy until you find a new tenant.

If you have a single-family home, you’re out that money until you get a new renter. In many cases, this is why it’s imperative to hire a professional property management company that can help you get your place ready, advertise it, and provide showings as soon as possible. Property management firms know how expensive turnover costs can be, especially if properties are left vacant for any amount of time. That’s why they rally their resources, head to the internet, and work with their network of vendors to ensure places are pristine and looking their best.Then, new tenants will be attracted and want to move in as soon as possible.

3. Cost

The affordability award goes to single-family homes. Not only are single-family homes more affordable in general, but it’s also easier to get loans for them. If you’re seeking funding for a multi-unit investment, you might need to apply for a commercial real estate loan. These loans often require a larger down payment than single-family homes and necessitate a more substantial chunk of liquid change—usually six to twelve months—to approve the loan application. On the other hand, single-family homes typically cost less and have far easier obligations to meet in terms of obtaining a loan. A convention real estate loan usually requires about 20% down, versus 25%-30% for commercial loans. It’s only a small difference in terms of percentage points, but the monetary difference can be exponential, depending on the property you’re considering. Your cash reserves usually need to be around six months’ worth of mortgage payments for a residential loan, versus up to 12 months for a commercial loan.

The interest rates for commercial loans tend to be higher, as well. For a single-family home with a residential loan, you’ll pay the going APR; commercial real estate loans often run 2% to 2.5% higher than residential real estate loans.

Of course, if you have a lot of maintenance to perform on your single-family investment (see bullet #1 above), you could wipe out all of your savings in repair costs. That’s why it’s essential to understand not only the initial math of your investment equation but the underlying costs that could build up quickly after you sign on the dotted line.

4. Tenant Complaints

As a landlord, you’ll be tasked with answering tenant (and maybe neighbor) complaints at all hours of the day, no matter if it’s a weekday, weekend, or holiday. When you only have a single-family home that you’re renting, you’re limited to the number of complaints you can receive from your tenants. In theory, you’ll hear from them very infrequently, mainly if you keep the property well maintained. On the other hand, a multi-unit complex opens you up to many complaints.These can range from problems with the property to neighborhood complaints, issues with the building, and unclassified situations we’ve not yet heard of. The more homes your managing, the more likely you are to hear petty complaints that aren’t relevant, and the more likely you are to have to deal with real issues that come up when you’re least expecting them.

5. Limit on Loans

Because multi-family properties are typically more expensive than single-family options and they often have a higher interest rate, investors with good credit and the ability to check all the lenders’ boxes can usually qualify for a higher limit on their loans. According to LendingTree.com, the 2019 limit for a two-unit property with an FHA loan was $403,125, versus the loan limit of $314,827 for a single-family property. Multi-units could be approved for as much as $605,525 for a four-unit property. That’s a lot of room to invest for people who have the qualifications to make the banks happy and have the flexibility to deal with multiple tenants in their new investments.

6. Versatility

We give the award of versatility to multi-family units. Let’s say you have a four-unit home, and you choose to live in one of the units(this is often a wise choice because it can save you money in terms of the loan, insurance, and other matters). That leaves three units left for rent. Now, you rent two of them, and you have one unit left. It may behoove you to rent this unit on Airbnb or some other short-term rental site so you can have ongoing income without dealing with the needs of renters. Even if you choose not to live in your investment property, you’ll still have these options.

Be sure to check the terms of your mortgage, as well as federal and local laws, to ensure you’re legally permitted to rent your space on a short-term basis. If all is well, you could conceivably make more on a short-term rental than you would with long-term tenants. Of course, that also means you’ll be responsible for regular upkeep such as cleaning, laundry, and general concierge services. However, the effects could be quite profitable if you’re in the right area.

7. Economies of Scale

This one also goes to multi-family homes because it’s easier to scale multiple units or homes than several single-family homes. If your goal is to have 20 rental units in your portfolio, you’d have to buy 20 individual houses if you’re working with single-family properties. On the other hand, if you’re going for multi-family properties, a single building could afford you two, six, eight, or even all 20 of the units you desire without looking elsewhere.

Property management companies usually charge higher fees for single-family homes than apartments or multi-family properties because they’re harder and more expensive to manage overall. Even though you might only have one roof or one HVAC system, the cost of coming out to deal with the property on an ongoing basis can eat into your bottom line because there’s not a ton of extra money coming in from the property.

8. Selling

The opinions of selling pros and cons vary significantly within the industry, but if you think about it, single-family homes are far easier to offload than multi-family dwellings. Even if you have a huge portfolio of ten individual houses, you can still sell one house off at a time while keeping the others for investment purposes. In that case, you’re not trying to attract other investment professionals in particular; you’re merely selling a house to anyone that might want to live in that house.

Alternatively, if you’re selling a multi-unit property, your audience is specifically people who are looking to be landlords or, at a minimum, property investors who are responsible for that property. This is a far smaller population of people who are simply looking for houses to buy, which means you need to market yourself accordingly and be prepared to wait a long time until the right investor comes along. While this is similar to selling a single-family home, the buyer pool is significantly more reduced if you’re working with multi-family units. If you think you might want to sell quickly at some point, or if you want to have the option to bail on one or two of the houses in your portfolio, it’s best to stick with single-family homes.

9. Equity in Flipping

A lot of mismanaged multi-family properties are gold mines waiting to be discovered. If you have the money and sweat equity to put into a flip for a previously under-served property, you can get significant gains in the market. That’s because—unlike single-family homes, which are valued based on comps around the neighborhood—multi-family units are valued based on the amount of income they bring in. If you’re able to buy a shabby multi-unit home for a reasonable amount, refurbish it, and turn it into a profitable place with increased rents, you’ve increased its overall value. Then, you can walk away, knowing you had control over the value of the property you purchased. Single-family homes, on the other hand, are often left to the neighborhood, the amount of money the neighbors are willing to sell their properties for, and other elements that are outside of your control.

There’s another upside in this flipping process; you can remodel individual units as they become vacant while still bringing in income from the other units. This isn’t possible with single-family units because your income depends on the people who are living in your investment property. You don’t want to displace them by renovating around them, which means you have to wait until they’re gone to do any renos. In that case, you’re not bringing in any income. It’s a double-edged sword if you’re looking for income via a flip-and-go process.

10. Turnover Rate

Single-family rentals usually get the reward for the lowest turnover rates. This is because they’re often occupied by families of stable professionals who don’t want to move every year when their leases are up. On the contrary, multi-unit rentals typically encompass renters who are looking for short-term living situations (even if they’re in year-long leases), which can cost you more in turnover costs over time. Of course, each case is different. But generally speaking, single-family units tend to have a lower turnover rate, which means you’ll have less cleaning, advertising, and background checking to do if your tenants stick around for more extended periods. Tenants in single-family homes often think of the rental as their own home, and they typically behave as such. This means less maintenance and fewer complaints overall. There is no one-size-fits-all answer to this question. What’s important is analyzing your unique situation so you can understand the potential pitfalls and benefits of each type of property. It’s essential to weigh the negatives and positives on the same scale so you can see where you’ll hit your best point of balance. Once you understand what the winning combination will be for you and your renters, the rest of the search for your perfect property will begin to fall right into place.

Leave a Reply