Many people ask the question is it better to invest in single-family or multifamily rental properties? A lot of investors assume multifamily properties are the better investment because they are built to produce income for landlords. However, I invest in single family homes because they give me great returns, are easy to find and easy to manage. I have 16 single family rental properties and each one is giving me over 15 percent cash on cash returns. I go through exactly how I get these returns in my complete guide to purchasing long-term rental properties. However, many successful investors also invest in multifamily properties. I believe the better investment depends on what you are looking for and what you can buy in your market. Here is why I think single-family homes are better in my market.
I can buy single-family homes below market value easier than multifamily properties
The main reason I get great single-family rentals is I only buy properties that are below market value. Good deals are hard to find, but they are out there if you know how to find them. I try to buy properties at 70 to 80 percent of market value. Usually, the properties are cheap because they need work or have very motivated sellers. Not only do I make money as soon as I close because I bought the property below market, but I almost always add value through repairs or improvements as well.
I have purchased rental properties that were REOs, short sales, fair market sales and estate sales. There are many ways to purchase properties below market value. Some of the keys to buying properties below market value are making offers quickly, having cash to purchase properties or strong financing and having a good reputation for closing on properties.
Single-family versus multifamily complexes
In my area, we do not have a lot of multifamily housing, so single family homes are much easier to find. I can find much better deals on single family homes, than on larger multi unit projects, simply due to supply and demand. I know in some areas, multifamily houses produce great returns, but in my area, I can actually make a better cash on cash return by purchasing and renting out single-family homes than I can with multifamily.
There is no way I could make over 15 percent cash on cash returns with multifamily, I have to pay too high of a purchase price for multifamily. If I were to buy single family properties at market value, I couldn’t make 15 percent either, but there are so many more single family properties out there that there is a better chance of getting a great deal on single-family homes.
Why can I make more money with single-family homes?
The CAP rate on multifamily homes in Colorado is around 5 percent. It is really hard to make money with a CAP rate that low. The CAP rate on single family homes I buy below market value is around 8 percent, sometimes higher. I don’t know for sure why the CAP rate is so high on multifamily in Colorado. I would guess it is because we have a booming economy, great market appreciation and large institutional investors are buying multifamily properties with cash. Those large investors are not as concerned with getting awesome returns as the small investors are. The large investors are looking for modest returns and a safe place to park their money.
In other areas of the country, I see CAP rates for multifamily at 10 percent or higher. This is why it is important to know your market and make your own investing strategies. It does not make sense for everyone to do exactly what I do. You need to know your market and what the returns will be for different types of assets.
Single-family homes are easier to manage than multifamily
I feel single-family rentals are easier to manage than larger complexes. With a single-family rental, I do not have to pay any utilities, the tenants pay them all. In multifamily properties, the landlord is usually responsible for the water and sometimes electric and gas as well. Many tenants feel a single-family rental is their own home, not just an apartment or place to live. They usually take good care of the property and even fix and repair items themselves. They also tend to stay longer and renew their leases year after year. My parents have had a single-family house rented to the same family for 12 years! I have tenants that have been in my houses for over 4 years. Here is an article on how to find a great property manager.
Single-family homes are less expensive to buy than multifamily
Single-family homes are usually less expensive to buy than large complexes with multiple units. The large complexes bring in more rent, but because of that, they are much more expensive to buy (at least in my area). With a single-family home, the down payment and repairs are usually less than multifamily properties, and the maintenance is usually less as well. Here is an article on how to buy property with little money down.
Appreciation is higher on single-family homes
Single-family homes historically appreciate more than multifamily properties. Multifamily properties are valued on the rents coming in and condition, while most single-family homes are valued on supply and demand of owner occupied buyers. If rents go up in an area, then multifamily housing prices will rise as well, but only if the rents are raised to meet market rental rates. However, I feel you should always invest for cash flow and any appreciation is a bonus.
What are the advantages of multifamily properties over single-family rentals
There are also many advantages to multifamily properties. As I mentioned, some areas see higher returns on multifamily properties than single family properties. Multifamily properties are also valued based on the income they produce, which can create opportunities. If a multifamily property is under rented or improvements can be made that greatly increase the income, you can greatly increase the value of the multifamily property.
Many investors buy large multifamily buildings that are run-down or have too low of a rental income for the market. They slowly repair the property and raise rents, which greatly increases the value. The nice part about this strategy is you do not have to hope market rents or values increase, you can force the value to increase by increasing the income the property brings in.
If you buy multifamily properties you will have more units under one roof, which some investors think is an advantage. Usually, you will bring in more rent per square foot with multifamily properties, which means the maintenance may be less over time. I think you have to couple this with the fact that rents are usually lower for multifamily, and in my experience, the tenants do not take as good of care as an apartment as they would a house.
You can buy multifamily houses with conventional or FHA mortgages. If you are able to buy a four-unit building with a conventional or FHA mortgage, you will be able to live in one unit while you rent out the others. You can only have one FHA mortgage in most cases, and it is tough to get more than four conventional mortgages and basically impossible to get more than ten conventional mortgages. The technique of buying a multifamily building as an owner occupant is commonly called house hacking.
For more information on how to buy the best rentals which will make the most money, check out my book: Build a Rental Property Empire: The no-nonsense book on finding deals, financing the right way, and managing wisely. The book is 374 pages long, comes in paperback or as an eBook and is an Amazon best seller.
I am going to keep buying single family homes because I can get better deals, I can manage them easier, they appreciate more, and they require less cash to purchase. In some areas, it may make more sense to buy multifamily housing, depending on what the returns are. If you want to house hack, it may make more sense to buy a four unit building than a single family. Single family is not better than multifamily, it all depends on the individual investor.