Single Family Versus Multifamily Investing
Wow the interesting conversations you get into at real estate investment groups. Like politics, people are very strongly opinionated in what they believe to be true. I chuckle because what is true in ones person's mind may be viewed differently in another person’s mind. As was the topic last night on a conversation being tossed around about investing in single family homes versus a multi family property. So which is better, a single family investment or a multi-family investment?
This debate has always interested me. I see some people get very defensive when debating this question as they state their case for whatever happens to be their preferred investment.
Clearly these debates suggest one clear objective. The answer lies within your passion. What is it you want to accomplish and what level of management do you wish to undertake? While a property management company commonly may be hired to run the properties in either case, there are still a number of considerations to take into account for either investment.
Contrary to the belief of the strong willed investors, there clearly is no right and no wrong investment class here. The best investment for you is one that best fulfills your objective and investment strategies.
We will look at the pros and cons of each of these investments so you can make a sound investment decision for you, but first things first.
Where do you buy these investments?
Before trying to identify the best product for you (Single family or multifamily), you want to establish the first objective for any and all investors, where should you invest. If you have any interest in real estate investing you will understand the expression, “real estate is all about Location, Location, Location.” You always want to invest in the best location.
Safety and sustainable investments is the goal so identifying where to invest should be the first objective.
Single family or Multi- family, lets break it down with the top 3 Pros and cons for each.
Single family pros:
1. Fewer tenant turnovers; Tenants tend to call a single family rental "their home". They tend to own more things and as they are happy in their home with more belongings they tend to live there longer. This equates to less tenant turnover and less expenses for the owner as all investors know that tenant turnover is there single largest expense.
2. Better controls over expenses: On a single family rental the tenants typically pay for all utility expenses. The only expense paid by the owner are the standard taxes and insurance (perhaps a mortgage). This provides for more predictability over the cash flow.
3. Higher equity growth: Appreciation is one of the best wealth building principles and is best captured in the single family market. The best equity growth position will of course be the property that will sell to a retail buyer at the time you sell. Retail buyers are buyers who want to buy for themselves and / or perhaps a family. The single family home has always been the most highly sought after property for a homebuyer and therefore will demand the best (retail) pricing. These properties that are used for investments tend to be the most highly sought after price points as well and therefore tend to appreciate greater than any other real estate investment class. Obviously buying the right property in the best market for equity growth position is paramount to capitalize on this equity growth.
Single Family Cons:
1. One tenant: When the property is vacant there is no revenue coming in unlike a multi-family unit that has additional tenant bringing in at least some revenue. Another reason location is so important. You always want to own rental in a highly sought after location where housing is in highest demand.
2. Price per unit: The cost per unit (commonly referred to as per door cost) is higher than the per door cost of a multifamily property. This higher (per door cost) often reduces the cash flow on a per door basis.
3. Higher repair costs: With one unit there is no economy of scale pricing, so repairs can be more expensive.
1. Economy of scale pricing: With multiple units you can often get better pricing, even property management fees tend to be less because of this economies of scale.
2. Financing: Loans for Multifamily properties are tied to the financial merits and performance. When you have 5 or more units this loan is a commercial loan and most often based on financial merits of the property and not tied to your personal credit score.
3. Higher cash on cash returns: when seeking higher cash on cash returns for the Multi- family. You have one roof that needs repair and multiple tenants to help pay for repairs. Or you have multiple units to manage so a property manager may discount the fees/ of the building. (again this is a benefit based on economy of scale pricing)
1. More transient tenants: One of the largest expenses to the owner is the turnover cost of tenants. Apartment dwellers tend to be smaller families or individuals who move more often, resulting in higher cost and less predictable returns.
2. More tenant issues: The more people living under one roof often result in more domestic challenges such as loud neighbors or a neighbor taking your parking spot and challenges of co-habiting.
3. Additional maintenance cost. All common areas such as hallway maintenance, paint, electricity and cleaning as well as lawn care and snow removal (where applicable) are the owners cost. These costs reduce the controls the owner has over expenses.
Single Family Versus Multifamily Investing Wrapup
As you can see there are pros and cons to both investments. Deciding what is most important to you will help you narrow down the best investment for you. So as you can see there is no best or worst investment, it is which of these pros and cons are most important to you and your investment style
Who tends to buy the single family investments? The investor looking for a nice passive investment where they can hire a property manager and not have to worry about a variety of issues arising? These investors simply want a nice safe and sustainable investment secured by real estate. They have a larger desire for a nice mix of cash flow and equity growth.
Who tend to invest in multifamily investments? This investor tends to be more actively involved in the investment. Even with a property manager they understand they will have to be involved with the decision making process to the variety of items that arise from the number of units they own. This investor tends to have a bigger desire for cash flow than for equity build up as the values of the building is only tied to the rents that are generated.