Investing in residential real estate is a common move for investors of all varieties, as real estate is an area with significant potential growth, passive investment opportunities, and a multitude of ways to get started. Building a real estate portfolio starts with purchasing a single residential property, but it’s hard to know what the best initial acquisition is, even hypothetically.
New real estate investors typically need to decide between multifamily real estate and single family real estate for their first acquisition. A single family home is meant to house a single family, with a single unit, while multifamily properties typically have many units that can be rented to multiple individuals simultaneously.
It’s tempting to think that multifamily properties are always superior, because they offer more units and more potential growth, but is this the case?
Setting Your Goals
First, it’s important to understand that this question depends heavily on your goals and your vision for the future of your real estate investments. The right answer for one investor isn’t necessarily the right answer for another.
If you’re still working out what your goals and strategies are, it’s a good idea to work with an expert to get some perspective and guidance. For example, you can work with a team of property managers at a property management company. Property managers have experience with both single family and multifamily houses, and they typically have the knowledge and expertise necessary to help you make the right decision for your portfolio and your strategy.
Keep in mind that your goals and perspectives may change in the future, and consider optimizing your portfolio to accommodate those changes.
Why Multifamily Could Be the Better Choice
There are several reasons why a multifamily property could be the better option:
- More total income. One of the biggest appeals of multifamily properties is that they typically generate more income overall. With a single family home, you might be able to generate $1,500 of revenue each month, but a similarly sized multifamily home may be able to generate $2,000 of revenue each month, with two units paying $1,000 each. In most cases, multifamily homes are bigger and more expensive, allowing you to generate far more income than you could with a typical single family home.
- Less vacancy impact. Vacancies are problematic for all types of properties, but with multifamily homes, there’s less of an impact. A vacancy in a single family home can leave you without any income to offset your expenses, but a vacancy in a multifamily property simply means a temporary decline in your total income. You’ll likely have other units in the property to help offset this temporary burden.
- Simpler management. Managing a network of single family homes is usually more challenging than managing a single multifamily property. It pays to have all your units in one, easily accessible space.
- Financing benefits. In many situations, you’ll have a wider range of financing options if you choose to buy a multifamily property. That’s because of the income potential making them less risky in the eyes of lenders.
- Easier scalability. It’s somewhat easier to scale with multifamily properties than with single family properties, as you’ll be able to add more units to your portfolio with each purchase. It can greatly reduce due diligence costs.
- Appreciation potential. Multifamily properties also have tremendous appreciation potential, especially in highly popular areas.
The Limitations of Multifamily Properties
However, there are some limitations associated with multifamily properties that make single family homes worth considering as well:
- Higher purchase price. As you might imagine, multifamily properties are typically more expensive than their single family counterparts. This can make them prohibitive for new investors to purchase.
- Higher costs. Every investment property is going to come with costs. Because of greater complexity and a higher total number of units, multifamily properties are associated with higher expenses than their single family counterparts.
- Potentially greater risks. There are also potentially greater risks involved with multifamily properties, because they cost more and come with higher stakes. If you make a mistake in a new property acquisition, multifamily properties are much more punishing.
- Less liquidity. Also, multifamily properties are typically less liquid. In stagnant markets, you might have a hard time offloading a multifamily property, even if you price it aggressively. Single family homes are traditionally easier to sell.
It’s not correct to say that multifamily properties are a better investment than single family properties, regardless of how much experience you have investing or what your portfolio currently looks like. The reality is, multifamily properties have a mix of advantages and disadvantages that you’ll need to consider carefully before choosing to add one to your portfolio, regardless of when you do it.
Founder Dinis Guarda
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