Single Family VS Multifamily Investing: A Detailed Comparison

When investing in real estate, one of the first options you’ll face is whether to invest in single or multifamily properties.

For some, single family vs multifamily investing isn’t even a consideration: they get lured into single family investments with the aim of quickly renovating a property and flipping it for a nice profit, but even huge investors with millions of data points at their fingertips struggle here: Zillow’s well-publicized issues highlight just how important it is to pick the right strategy*.

On the other hand, multifamily investments can generate considerable income, but the barriers to entry are much higher, and it’s harder to adopt a “DIY” approach.

In this article, we’ll explain in detail how single and multifamily investments compare, drawing on our own expertise (re-viv currently has more than $7.5m in assets under management deployed across over 30,000 square feet of real estate) and over a decade of experience.

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What’s the difference between single family and multifamily properties?

A single family property comprises just one residential unit. Also called a “detached dwelling” which simply means it is a standalone structure.

A multifamily property, such as an apartment building, has more than one residential unit, and each of those different units is typically rented out by a different tenant.

Each type of property has its own pros and cons.

At a very high level, from the point of view of an investor, a single family unit is cheaper, on average costing between $300-400k. This makes it much easier to enter the market. Multifamily properties are more expensive, and the market is much smaller.

However, a multifamily property will generally have a lower cost per unit and higher cash flows than the alternative single family rental. We’ll go into these subjects in more detail further on, looking at popular markets.

Advantages of investing in single family rentals

Before going into detail on the advantages of investing in single family rentals (sometimes abbreviated to SFRs), it’s worth considering some of the basic strategies that investors use.

The most straightforward is to buy a property yourself, fix it up (if required) and rent it out. “Fix and flippers” aim to get in and out fast for a quick buck, but investors can also take a much more long-term view, enjoying the rental income.

There’s also a middle ground: you could refinance the refurbished property, taking advantage of a (hopefully) increased valuation to pull money out, before renting. This strategy is known as BRRR (which stands for build, refurbish, refinance, rent).

A different way would be to invest as a debt partner on a specific project: that means you lend money to someone who will in turn buy a property, fix it up and typically flip it. People making this sort of loan would expect a return of between 6-12% if all goes to plan.

Lastly, it’s possible to invest with a sponsor, who is responsible for sourcing capital from multiple outside investors, putting it to work on one or more projects, and ensuring a good return for the equity investors.

So what are the advantages to investing in single family dwellings?

Favorable interest rates and lower down payments

Lenders typically require a down payment of 15-25% for a standard residential real estate loan. That compares well to multifamily: any property with more than four units would require a down payment of 25-30%, and rates are typically between 2 and 2.5 percentage points higher.

So for a $500,000 single family property, you’d be looking at a down payment of $50,000-100,000, and monthly interest payments of around $1,500. For a multifamily property with the same value, you’d need a down payment of $125,000-150,000, and mortgage payments would be in the region of $2,000.

Let’s look at some real-world examples: for a good quality, occupied, ten-unit building in Cincinnati, OH, expected costs would be significantly higher: a property might be valued in the region of $1m+, which would require a down payment of around $250,000 and monthly mortgage payments of roughly $4,000-5,000.

In a very active market like San Francisco (one of the most expensive cities in the US), costs would be higher still: for a similar property, you’d be looking in the region of $5m+. That would require a down payment of roughly $1.25m and mortgage payments in the region of $15-20,000 per month.

Low barriers to entry

Single family real estate is a very accessible investment, making it easier to get started. Factors at play here include:

Low ticket size: a single family property can start at $100,000 or sometimes even lower, making it more accessible for first-time investors than many other types of real estate.

Ease of financing: there are countless mortgage lenders out there willing to provide financing to creditworthy home buyers. You won’t need any specialist accreditation or qualifications (such as rent roll) that are needed for multifamily properties.
Ease of purchase: relative to purchasing an apartment block, for example, a single family unit is much simpler to purchase, with fewer legal challenges and fewer moving parts.

For new investors, Biggerpockets is a great place to start, providing education, tools and a community to help people get up and running.

And because single family rental properties are easy to buy, they’re also easy to sell, meaning that it’s much simpler for you to exit an investment when you’re ready. This compares well against multifamily properties, where you’ll need a carefully planned exit strategy.

Easier to diversify across multiple areas

This is a double-edged sword, which we’ll come back to later. But if you want geographic diversification (properties in multiple regions), then of course this is easier to achieve with smaller ticket sizes. It’s much easier to purchase single family properties in Atlanta, San Francisco, and Raleigh and build up an investment portfolio for example, than it would be to find (and pay for!) a multifamily property in each location.

Multifamily does provide another form of diversification though, which we’ll come back to.

Disadvantages of investing in single family properties

Lower cash-on-cash return in single family investing

It’s easy to look at a house and think to yourself: “I can buy it for $200k, fix it up for $30k, rent it out for $2k a month, and sell it for $300k when I’m done”.

It’s much harder to put this into practice. A big factor is the competition in popular areas: it’s very challenging to earn a meaningful cash on cash return in a place like San Francisco. As a result, even if that return is low risk, you might find yourself really sweating to earn just a few hundred dollars in income a month.

Meanwhile, in less-known markets—Little Rock, Arkansas, for example—there’s a better prospect of cash on cash return but less potential for equity growth. There’s also much more risk attached: ask yourself what would happen if a couple of major employers pulled out of the area, for example.

Even looking at pure cash flows, for a single property these tend to be low (a few hundred dollars in monthly income) in most cases. And a single repair or issue such as a broken heating and cooling system, water heater, or a roof replacement can wipe out profits altogether. In order to really generate wealth in single family real estate, you need scale, which is much easier to get with multifamily rental properties…

Hard to reach scale

Why? To get to 10 single family rental units, you need to find ten different properties, go through ten different negotiations, pay ten sets of legal fees… Transaction costs on real estate can make up a significant portion of the total property value, and so the additional time and effort required to reach the scale you might have in mind can be prohibitive.

Quality of Vendors

It is extremely difficult to source good contractors in the single family home market, specifically for investment opportunities. Additionally, good property managers willing to take on these types of properties are even more difficult to come by and typically require higher fee structures to manage due to the limited cash flow.

Advantages of investing in Multifamily Properties

Valuations based on property income

Single family properties are valued based on the opinions of third-party appraisers, and the value of comparable properties on the market.

By contrast, a multifamily property is valued based on the income it generates. While appraisers still use comparable sale types and rentals in their process, the individual buyer market plays a huge role in determining value. This is conveyed through the “cap rate”, which is the net operating income divided by the sale price. In this way it’s valued like a business, based on cashflows.

This creates a real opportunity: if you can get into a higher barrier to entry market like San Francisco and Oakland and make just a small operating improvement, you can make a serious impact. A new common area or external improvements for a multifamily property can add value to all the units you own on that property. On the other hand, the same level of operating improvement in a single family unit won’t really move the dial.

For example, imagine you own a $1,000,000 multifamily property in San Francisco with a cap rate of 3.5%. If you were to improve your Net Operating Income (NOI) by a mere $15,000 per year, this would equate to a $428,571 dollar improvement in value ($15,000 in improved NOI / .035 Cap Rate).

Take that same property in, say, Cincinnati, Ohio which is selling for a 6.5% cap rate. That same $15,000 improvement only equates to $230,769 in improved equity or value ($15,000 NOI / .065 Cap Rate).

Quite a significant difference. That said, each property has its own nuances. That property in San Francisco most likely won’t have cash flow or will have negative cash flow but, if bought at the right time in the market, will appreciate. The property in Cincinnati will most likely provide strong cash flow but could have limited appreciation over the long term.

Economies of scale

A big benefit of multifamily investing is the scale that comes with it. It’s very difficult to find good quality property managers who can manage the single family investment property. When searching for quality contractors, it’s fair to say that the quality and sophistication of a contractor whose average job size is $50k is going to be different than someone who handles $500k-$2.5 million dollar jobs. The cost per occupant of maintaining a 10 unit apartment building is generally much lower than the comparable figure for a single family unit with just one or two renters.

If you get to 20 to 30 units, things get interesting: now you have an onsite property manager. For an 80 unit apartment building, you have an onsite manager plus a property management company as well as your in-house maintenance team.

So when something breaks, your in house maintenance goes out there and fixes it. For a single family home, you’ll have to call a contractor, significantly eating into your bottom line. There’s also less efficiency by way of increased operating burden to deal with a contractor who is a vendor rather than someone who may be a W-2 employee.

Tax Implications

Multifamily housing generally benefits from more favorable tax treatment than equivalent single family housing. To give a couple of examples:

Owners who proactively manage their taxes can benefit from the ability to expense depreciation, reducing tax liabilities
Cost segregation allows for depreciation to be accelerated, realizing costs over a shorter period of time, significantly increasing allowable expenses
Section 1031 allows a property owner to defer capital gains costs when selling a property by reinvesting the proceeds into another, similar property

Naturally this can be complex, but benefits like these can be a real advantage for multifamily owners.

Another benefit of the scale that comes with multifamily investing is that you get an economies of scale which protects you in times of vacancy or bad tenants. Take for example the unlikely scenario of an eviction.

In a Single Family Home if a tenant is evicted and the property remains vacant for three out of the twelve months, your vacancy rate is 75% for the year. In a ten unit building if a tenant is evicted for a period of three months, and all other tenants stay, your vacancy rate is 97.5% for the year.

Vacancy is the first line item deducted from your expenses before bad debt and before you reach your monthly expenses.

Want to know more? Take a look at our more detailed guide, analyzing multifamily investment opportunities and our broader overview, investing in multifamily property.

Disadvantages of investing in Multifamily properties

Higher barrier to entry

All other things being equal, a multifamily property is more expensive than a single family property, increasing the minimum ticket size needed in order to get started.

But that’s just part of it: it’s much harder to find backers for projects of this size unless you (and potentially your team or partners) have a tried and tested track record, having successfully executed on smaller deals in the past. Otherwise, significant multifamily investments can be tough to enter into, except for those who already have access to capital via family and friends or a windfall such as an inheritance.

Increased risk

Raising outside equity and debt and doing bigger deals also brings with it much more risk. Multifamily investments tend to be led by people with experience in real estate investing, and newer investors without experience are exposed to much larger potential costs if things go wrong.

Comparing Single family with Multifamily investing with real examples

In this section, we’ve created a side-by-side comparison of two properties, so that you can compare the benefits of multifamily with the single family example listed above.

	Property 1 10 unit building Austin, TX*	Property 2 10 unit building in Cincinnati, OH*
Asking price	$1,495,000	$450,000
Units	10	10
Cost per unit	$149,500	$45,000
Monthly rent	$10,500	$5,350
Occupancy (expected)	90%*	95%*
Mortgage (with 20% down payment)	$6,240	$1,702
Property tax (monthly)	$1,416	$650
Management/operating expenses (monthly)	$3,515	$1,300
NOI (annual)	$60,518	$36,419
Cap rate	4.05%	8.09%

As you can see, the two properties–which are both in popular areas for multifamily investing–offer very different investor outcomes. Which brings us to our final section:

Who should invest in Single family vs Multifamily properties?

When it comes to single and multifamily investments, there are always cost benefits and trade-offs. Investing alone in a single family home or small multifamily gives you all the control, but you also get a 100% share of the headaches.

By contrast, investing with a real estate company or sponsor gives you almost no control but allows you to carry on with your life and let someone experienced take care of day-to-day issues.

That’s why many people refer to these types of investments as “passive”: you’re not required to take an active role in managing the investment. I.e. you are passively investing your money

While single family investments are more accessible to the average investor, cash flows are limited. To generate really significant income, multifamily real estate has the edge, but it’s also a more challenging market to enter into.

That being said, the right real estate investment strategy is the one that works for you: so consider your goals, and how each approach might meet them, without exceeding your risk threshold.

Of course, in this article we’ve focused on direct investments into single and multifamily properties—it’s also possible to invest indirectly via a fund. Our guide to the best multifamily investment companies is a great resource if you want to find out more.

Looking for the right investment company to partner with?

re-viv help investors drive growth with scalable investment strategies

Get in touch now

References:
https://www.cnbc.com/2021/11/02/zillow-shares-plunge-after-announcing-it-will-close-home-buying-business.html

https://www.realtor.com/realestateandhomes-detail/5313-Indio-Dr_Austin_TX_78745_M72624-34476

https://www.loopnet.com/Listing/3337-Reading-Rd-Cincinnati-OH/24427753/

https://www.loopnet.com/Listing/2901-Sweeney-Ln-Austin-TX/25096197/