Categories
Are Single-Family or Multifamily Properties the Better Investment?
Last Updated on February 17, 2022 by Mark Ferguson
What are single-family and multifamily properties?
A single-family home has one unit. Usually, one family lives there, and that is why it is called a single-family home. In many towns, the zoning laws allow more than one family to live in a single-family home, but two or three families live together. Most towns limit how many unrelated people can live in a single-family home. If you are renting out single-family homes, you may not be able to rent the property to 5 different college students. The zoning laws will tell you who can live there. If the house is located in an area that allows multifamily properties, you may be able to rent to unrelated parties, but always check with zoning before investing in properties!
A multifamily property is a house or apartment that has more than one unit. A duplex is two units and could have two units right next to each other or one unit on the main floor and one in the basement. A triplex has three units and a fourplex four units, and so on.
The interesting thing about multifamily properties is you can buy a 2 to 4 unit as an owner occupant. The advantage of buying as an owner occupant is that you can use low-money-down loans like FHA or VA. You must live in one of the units, but you only need to live there for one year in most cases. Buying a multifamily property as an owner occupant is commonly known as house hacking and is a great way to get started investing in real estate.
You can also buy a single-family home, live there a year, and rent out the home after a year. Depending on the zoning, you may be able to buy a single-family home and rent out part of it as well.
I bought my first rental property in 2010. It was a single-family home I bought for $96,900 and recently sold for $275,000. The property was first rented out for $1,050 a month, and that increased to $1,500 a month before I sold it. I bought 14 more single-family rentals in the next five years and one duplex. I liked single-family homes because they were easy to buy, I could get a great deal on them, and they were easy to rent.
I stopped buying rentals in 2015 because prices got so high in Colorado and the rents did not keep up. I looked at buying single-family homes in other markets,but found commercial rentals in my area could cash flow still. I bought ten commercial properties from 2017 to 2020, with one of those being a mixed-use building with 3 residential units and 1 commercial unit.
The commercial properties range from 900 square feet to 68,000 square feet!
What are the advantages of investing in single-family properties?
The main reason I bought single-family properties was that I was very familiar with them since I was a real estate agent and knew how to get great deals on them. I also flip houses and have been flipping since before I bought rental properties. When I bought my single-family rentals, they also had great rent-to-value ratios and met or came close to meeting the 1% rule.
Buying below market value
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.
You can get good deals on multifamily properties as well, but because there are so many more single-family homes, it is usually easier to find good deals on them.
I have a brand new book that is all about commercial real estate. Build a Commercial Rental Property Empire. The good, the bad, and the ugly. I go over all the details of investing in the commercial business and include 10 case studies on my own properties. You can get the book on Amazon.
Rent-to-value ratio
When I was buying single-family homes, I could make more money on them than I could on multifamily properties. Every market has different rental rates compared to the value of properties. You will also find different rental rates compared to the price of the home when dealing with single-family properties. The lower the price, the better the rent-to-value ratio is for most markets.
In some markets, multifamily properties make more money, and in other markets, single-family homes make more money.
Property management
I feel single-family rentals are easier to manage than multifamily. With a single-family rental, I do not have to pay any utilities because the tenants pay them all. In multifamily properties, the landlord is usually responsible for the water and sometimes electric and gas. 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 15 years! I have tenants that have been in my houses for over 4 years.
There can be more turnover and more maintenance on multifamily properties because the rent is often lower meaning the qualify of tenants can be lower as well.
Easier to purchase
Single-family homes are usually less expensive to buy than multifamily. 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.
It can also be easier to finance a single-family home. Many banks are more comfortable lending on houses than apartments.
Appreciation
Single-family homes historically appreciate more than multifamily properties. Multifamily properties are valued on the rents coming in, while most single-family homes are valued on the 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.
You can add value to multifamily properties and single-family homes as well by repairing them or increasing the rents. I can do this with my commercial properties as well, but houses will usually go up in price more based on market increases.
Easier to sell
Single-family homes are usually easier to sell than multifamily properties. Single-family homes can be bought by investors or owner occupants. Most sales occur with owner occupants buying a house to live in. Because there are more buyers for single-family homes, they are easier to sell. The properties are also valued based on what other owner-occupied homes are selling for or the rent they have coming in if they are being used as a rental. You have two buyer pools. With multifamily properties, you are usually only selling to investors, especially if they have more than 4 units.
What are the advantages of multifamily properties?
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. There can also be economy of scale, meaning you can buy one property for much more, increasing the returns.
Value add opportunity
Many investors buy large multifamily buildings that are run-down or have low 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. I do this with commercial properties as well. I bought a 68,000-square-foot commercial property for $2.1 million in 2018, and it appraised for almost $4 million at the end of 2019 after we added new tenants and income.
You can also add value to single-family homes by making repairs, finishing basements, or even adding square footage.
Scaling
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.
If you buy large complexes, you can scale faster as I did buying larger commercial properties. However, it is not easy to start out buying massive deals! Sometimes it is much easier to buy single-family homes or smaller multifamily ones and use those to scale up.
House hack
With a conventional or FHA mortgage, you will be able to live in one unit while you rent out the others. This allows you to live for free in some cases because the other tenants are paying the mortgage with your rent. This also allows you to qualify for more properties easier because you have rent coming in from the beginning. If you buy a single-family home and do not rent out part of it while living there, there will be no rent or income coming in until you move out and find a tenant.
More income
In some markets, multifamily homes make more money than single-family homes. You have to make sure the expenses are not so much higher on the multifamily properties that it negates the extra income.
For more information on how to buy the best rentals which will make the most money, check out my book:Â 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 bestseller.
Conclusion
Single-family rentals get a bad rap sometimes, but my rentals made me millions of dollars over the years with a relatively small investment. They can be a great starting point to build wealth and income. I used the equity from my first rental to buy a 10,000-square-foot commercial property. I don’t think I would be where I am today if I had tried to jump straight into giant deals.