Deciding whether to invest in single-family rental properties or multifamily buildings can be a major choice for aspiring real estate investors. Both options have unique advantages and disadvantages in terms of financing, management, income potential, and more. For newcomers to real estate, single-family homes tend to have an intuitive appeal. But experienced investors often gravitate toward the economies of scale and income diversification offered by multifamily properties.
This guide examines the key differences between single and multifamily real estate to help investors weigh the pros and cons of each as part of their investment strategy. We’ll look at financing options, cash flow potential, management considerations, market trends, and more so readers can make an informed decision on the best real estate asset class for their individual goals and risk tolerance. I have invested in 12 multifamily properties as a general partner. Eight of those properties have successfully completed their investment cycles to date. My experience acquiring, managing, and selling these multifamily assets has given me a wealth of hands-on knowledge when it comes to real estate investing. So, should you focus on buying stand alone single family rentals spread across different neighborhoods? Or go big into large apartment communities with dozens or hundreds of units?
Understanding the Basics of Real Estate Investment
The Appeal of Single-Family Residences (SFR)
Purchasing a single-family home as a rental property is a very common way for new real estate investors to get started. The process of buying, renting out, and eventually selling a stand alone house is relatively simple and straightforward. This makes single-family homes an intuitive entry point for individuals looking to generate rental income from real estate.
There are several appealing factors that draw investors to single-family rentals:
Familiarity – Most people have experience living in or being around standalone houses. So the process feels more familiar than commercial or multifamily buildings.
Ease of financing – Banks offer standard mortgage products for buying single-family homes, making financing more accessible. Down payments are reasonable for most middle-class investors.
Local knowledge – Individual buyers can often leverage knowledge of a metro area and neighborhood to find promising rental properties in appreciating locations. Focusing locally makes it easier to evaluate homes.
Control – Owning a standalone rental gives individual landlords full control over property management. Investors get to make all decisions about maintenance, renovations, tenant screening, rent rates, etc.
So for investors who value simplicity and hands-on control, single-family rentals have an intuitive appeal over other real estate assets. The ability to self-manage and leverage local market knowledge helps explain why so many beginners start here.
Diving into Multifamily Home Investment
While single-family properties attract many new investors, multifamily real estate like apartment complexes and condo communities offer experienced investors unique advantages.
Below are some of the reasons why multifamily investments appeal to seasoned real estate professionals:
Reliable income – With multiple rental units in one property, multifamily complexes aren’t dependent on one tenant’s rent. Vacancies have less impact on the bottom line.
Economies of scale – Larger properties lead to cost efficiencies in maintenance, renovations, cleaning services, and more. Investors benefit from lower costs per unit.
Forced appreciation – Upgrades to amenities, fixtures, appliances allow landlords to command higher rents, directly increasing property value based on quantifiable improvements.
Leverage – Commercial loans and multifamily syndications open the door to larger total investments and access to equity growth impossible to achieve with standalone homes.
Diversification – Unlike single-family homes clustered in one area, multifamily properties allow investors to spread risk across hundreds of tenants in one asset.
For these reasons, experienced real estate investors often gravitate toward multifamily investments over portfolios of standalone single-family homes. The benefits of scale and reliable income overshadow the increased complexity.
Financing and Equity Growth in Real Estate
How to Finance Single-Family vs Multifamily Investments
When it comes to financing, single-family homes have a clear simplicity advantage. Standard mortgage products are available to individual buyers, whether owner-occupants or investors. typical 20-30 year fixed rate loans with reasonable down payments are easy to obtain.
Small multifamily properties with just a handful of units may also qualify for residential mortgages from banks. But larger complexes usually require commercial loans or multifamily syndications where groups of investors pool capital.
The complexity of financing larger multifamily properties increases quickly. But so does the potential for larger total investments and increased leverage compared to standalone single-family homes.
For example, let’s say an investor puts 20% down to buy a $500,000 single-family rental. That’s $100,000 out of pocket and $400,000 financed.
But investing $100,000 in a multifamily syndication that acquires a $10 million apartment complex provides access to a property 20 times larger using the same capital. Even a 5% stake in a deal this size can generate excellent returns.
So while multifamily financing is more complicated, it opens doors to equity growth impossible through standalone home ownership. Investors sacrifice control for increased leverage and economies of scale.
Leverage in Real Estate: Maximizing Your Investment
Building on the example above, an investor buying a single-family rental has leverage limited to the individual property’s value and whatever financing is available.
With a multifamily syndication, investors can tap into serious economies of scale and leverage not otherwise accessible. That translates to much greater potential for cash flow and equity gains compared to buying a standalone home.
But there are tradeoffs. Multifamily investors give up control over day-to-day management, renovations, etc. The general partner oversees all of this. So investors must do diligence up front to gain confidence in the GP’s abilities.
Still, for accessing major real estate investments and equity growth, multifamily leverages scale in ways individual home ownership simply can’t match. The numbers work dramatically better as properties scale up in size.
Property Management and Tenant Dynamics
Differences in Managing Single vs Multi-Unit Properties
Managing tenants in a single-family rental remains relatively simple. As the landlord, you handle issues one tenant at a time for each property. While time-consuming, it’s manageable for an individual investor.
But once you scale up to dozens or hundreds of units in an apartment complex or condo building, professional property management becomes essential. This adds costs but is necessary given the scale and complexity.
On the multifamily side, the economies of scale give owners access to bulk discounts on services and contractors they couldn’t obtain for standalone rentals. So larger investments offset the added management costs.
Which is Better for Passive Income?
For the most passive approach to real estate investing, multifamily properties have some clear advantages. Single-family rentals require significantly more hands-on oversight from the owner.
With large apartment complexes or condo communities, the economies of scale make it feasible to outsource all maintenance, renovations, cleaning, landscaping, screening, leasing, and repairs. Owners can take an almost entirely hands-off approach.
That said, smaller single-family rentals can also be relatively passive for investors who self-manage. Streamlined processes for recurring tasks like marketing, tenant communications, and maintenance can minimize day-to-day oversight once systems are in place.
So while single-family rentals involve more active management, outsourcing tasks and setting efficient systems can still allow owners to run their portfolio passively. This makes single-family homes ideal for rookie investors wanting mostly passive income with some added control.
Real Estate Market Trends and Location Dynamics
Navigating Market Cycles for Single and Multifamily Homes
Real estate markets fluctuate in cycles, and both single and multifamily properties are impacted. However, they don’t respond identically to macroeconomic trends.
For single-family homes, pricing is heavily dependent on location – down to the neighborhood level in many markets. Micro-trends in amenities, school districts, and housing development can all impact values.
Multifamily properties see less volatility from block-by-block factors. Their value is more tied to citywide supply and demand trends. During recessions, multifamily often outperforms as rents stay stable while home prices dip.
When choosing locations, single-family investors need to pay attention to neighborhood nuances and aim for appreciating pockets of opportunity. Multifamily investors look more at metro-level population, job growth, and rental demand indicators.
Tax Benefits and Insurance Considerations
Single-family rental investors enjoy tax advantages like the mortgage interest deduction. As owner-occupants they also get significant property tax savings in many states.
Multifamily ownership entities don’t get all the same breaks. But they benefit from economies of scale on property insurance and maintenance costs. Expenses can also be deducted.
For example, a 20-unit multifamily building will pay lower insurance premiums per unit compared to insuring 20 standalone homes. Bulk maintenance contracts offer similar savings.
So while the tax benefits differ, both single and multifamily real estate offer avenues for investors to reduce their overall tax burden through strategic deductions and income structuring.
Are you interested in learning more about multifamily real estate investing? Our team of experienced professionals is here to help. Whether you’re looking for advice on conducting market research or need assistance in identifying the best investment opportunities, we have the knowledge and expertise to guide you through the process. Connect with us today through our Telegram channel for real-time updates and valuable insights. Subscribe to our YouTube channel to access informative videos and expert discussions on multifamily real estate investing. Follow us on Instagram for inspiring visuals and exclusive content. Check out our new customized ChatGPTs: Real Estate Investing Coach and Real Estate Guru. Contact us now to schedule a consultation and take the first step towards achieving your financial goals in the multifamily real estate industry.