Single Family, 2-4 Unit Multifamily, or 5+ Unit Multifamily? Explore the Benefits of Each Here!
Multifamily or single family? Real estate investors have been debating these two strategies for a very long time. Our company has invested in single families, small multifamily (1-4 units), mid-sized commercial multifamily (5-40 units), and large apartment complexes (40+ units). There are benefits to all of these property types, and sharing our company’s experiences and outlooks on why we like each will help you weigh which type of property may fit your needs best.
As real estate continues to gain attention from more and more new investors, I thought an article giving some of the basic benefits of residential rental property types could help new investors find what property type will fit them best. In this article, I break down these types of property into single family, 2-4 unit multifamily, and 5+ unit multifamily.
We have a very unique perspective on this topic because not only have we bought all of these types of properties, but we currently still hold each of them in our portfolio. I think all real estate investment is a wise choice if well thought out. This is why rather than build a pros/cons list I will stick to the benefits of each property type and let you make the choice. I’d enjoy hearing your own experiences and opinions in the comments below!
Like many investors, we began our investing adventure with single families. It was safe, we understood houses, and so we felt secure spending all this money on a house. Owning an apartment at the time seemed scary and too big. As we learned the ropes of real estate investment, we noticed how great single families could be. Below are just a few of the many benefits.
Multiple Exit Strategies/Liquidity
One benefit we like about single families houses is you can pivot very quickly. The numbers of buyers, sellers, and transactions in single families is far higher than either multifamily category. If you buy a property with the intention to rent but notice great appreciation in your market, you can put it up for sale and realize your gains in just a couple months. If you bought a property to sell but later are unable to, you just quickly throw it on Zillow and get it rented out. Because of the amount of transactions occurring on a daily basis with SFRs, it is far easier to pivot or get liquid faster than in multifamily.
Length of Residency
Residents stick around longer in single family homes than they do in multifamily. Many of us know how costly turnovers can get, so if you are turning over every three years rather than every two, it can make a big difference to your bottom line over the life of the investment.
Relatively Small Cash Outlay
Probably the biggest reason many of us begin in SFRs is the capital needed to buy is less. If you have never invested in real estate or you don’t have a massive trust fund, it can be really hard to find enough capital to put into the first property. Single families make it achievable to do on your own through their lower price point.
The beauty of a long-term fixed rate mortgage on a buy and hold is a beautiful thing. In general, financing terms are more appealing when dealing in single families. Two to four-unit multifamilies will be similar, but the number of transactions lenders do for SFRs has made this type of property one of the most appealing financing options for investors.
Multifamily: 2-4 Units
After buying SFRs, our company ventured into small multifamily properties. Who hasn’t heard the classic “you only have one roof to replace but 4 people paying rent”? As opportunities arose for us to venture into these 2-4 unit properties, we took the leap. After owning them for several years, here are some of the great traits we have discovered through our own experiences, as well as those of other investors.
In 2-4 unit buildings, you begin to get the benefits of reducing expenses by combining them to service multiple streams of income. This could be the roof, the siding, the driveway, or any other shared expense that in a single family would be absorbed by the single rent.
Financing for 2-4 unit investment properties can be extremely appealing because they fall under residential lending guidelines, just like a single family. These properties are even approved for FHA financing, with as little as 5% down is easily accessible.
Reduced Vacancy Burden
If you lose a tenant in your 4-plex, you still have rent coming in form the other three units. This provides peace of mind and helps protect you from having to cover expenses during a vacancy.
Consolidation of Operations
It is nice to have multiple streams of income from each unit while only having to do things once from an operations perspective. You only have to pay one tax bill, you only have to drive to and check on one location, you have one call to get the grass cut, and you only have one bill to be processed for that service. I think you get the point — more income but similar responsibilities to the single family.
Multifamily: 5+ Units
After having success in single families and small multifamily, we began purchasing 5+ unit properties. Our current business model focuses on 60+ unit apartments, but the concepts in this article remain applicable, whether you’re looking at a building with 5 units or 5,000 units.
Control of the Property Value
Any multifamily property with 5 or more units will be considered commercial property, and as such, is valued based on the income it produces. This simple change from 1-4 unit buildings gives the investor the ability to raise the value of the property by increasing income or decreasing expenses. For an in-depth look at this point, I wrote a article titled “Why the Wealthy Invest in Multifamily & Commercial Real Estate,” which can be found here.
Economies of Scale
As you add units, you will begin to see discounts on your expenses. It’s very similar to the reduced overhead in the 2-4 units. As you continue to raise the number of units, you’ll be more and more able to reduce your cost per unit on all expenses. Think about it — if you go to your carpet cleaning company and say, “I have one room of carpet needing cleaning” or you say, “I have 100 rooms needing cleaning,” which will you be able to negotiate a better price on?
Efficient, Consistent, Easy to Navigate
The entire process of buying, managing, or selling a larger multifamily property is business/income focused. Most sellers do not get emotionally attached to their properties, buyers come to their offers based on financials, and both parties tend to be sophisticated investors. This makes the whole process efficient, consistent, and easy to navigate.
Whether you self manage or hire management, the large properties make it simpler to systematize and manage. Third party management for single family homes typically fall in the 8-10% range, while with large multifamily, it can be in the 4-8% range. The reason it cost less it because it’s easier.
There is no right or wrong type of property. It all depends on what your goals are. As many new investors begin to gain interest in rental property, I hope this will serve as a basic guide to help you make a choice to continue research into the type of property that fits you best.