Single Family vs Multifamily Rentals: Which Should I Invest In?

The Big Picture On Single Family vs Multifamily Rentals:

• • Multifamily often beats single-family for income, with built-in risk spread.
  • Single-family homes are easier to fund. 2 to 4 units still count as residential, but 5 or more units need commercial loans.
  • Both property types appreciate, but multifamily allows for more efficient forced appreciation through renovations.

Rental properties offer strong historic returns, low volatility, and ongoing passive income.

If you’re just starting on your journey, it can feel overwhelming because there are so many moving parts. For example, figuring out which property types best suit your business strengths can be confusing. Perhaps you’re debating between flipping houses or buy-and-hold real estate investing, commercial or residential, or single-family versus multifamily real estate investing.

When evaluating your options, consider factors such as the property’s return on investment (ROI), how you’ll finance it, and how feasible it is to build out your team. Both single-family residences and multi-family rentals are great choices for building wealth, but there are many considerations to consider before diving right in.

Are Single-Family Homes Easier to Invest In?

There’s a common misconception that it’s “easier” to invest in single-family homes. Some experts recommend that new investors opt for single-family rentals when they buy their first investment property because it’s less intimidating to learn about managing a rental property and, in most cases, easier to get investment property financing.

That said, there’s nothing wrong with going the multi-family property route. If you’ve looked at all the benefits and downsides and decided it’s for you, there’s no reason why you can’t invest in a multi-family. It might take a bit more research and upfront work, including figuring out how you’ll be able to get financing. However, the competition can be less fierce, the cap rates and real estate cash flow greater, and you can finance multi-family properties through lenders like RCN Capital and Commercial Loan Direct more easily than most new investors realize.

Investors can finance smaller multifamily properties (four units and under) with conventional mortgages or portfolio lenders such as Kiavi and LendingOne.

Cash Flow & Rental Income

If you compare the potential rental income for one multi-family home and a single-family home, the rental income for multi-family homes often proves higher. Think about it: multi-family homes have more housing units (compared to one for a single-family home). In other words, you could fill a multi-family investment property with more tenants, increasing your chances of someone occupying your property and giving you rental income.

Investors can generally earn more due to the extra units while lowering risk by spreading the income sources among multiple units. You can still have tenants covering the costs (or at least some of it) even if it’s not fully occupied, whereas with a single-family property, you suffer negative cash flow during all vacancies.

That means dipping into your emergency fund to get the property occupied again by cleaning, renovating, and advertising it. Keep in mind, though, that single-family properties tend to cost less than multi-family ones, which factors into your minimum down payment.

Finally, multifamily properties bring some efficiencies to your portfolio. Instead of four different roofs to maintain for four separate single-family rentals, you could have one roof over four units. And when you need to conduct semi-annual inspections, you can visit one property instead of four.

Comparison of Single-Family vs. Multi-Family Rental Properties

For a wider view, below are some of the most significant comparisons between the two types of properties.

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Investment Property Financing for Multi-Family vs. Single-Family Rentals

As mentioned above, getting financing for single-family properties can prove easier. More lenders offer loans against them, and you don’t have to worry about putting so much money upfront into a down payment and other closing costs compared to what you would for a multi-family property.

Still, financing multi-family properties isn’t necessarily harder, depending on the number of units. Legally, properties with four units or fewer are all classified as residential, so lenders often treat them the same as a single-family property loan. Try Kiavi or LendingOne to finance investment properties between one and four units.

However, buildings with five or more units qualify as commercial, requiring a commercial real estate loan. For these, try RCN Capital for loans under $1 million and Commercial Loan Direct for loans over $1 million.

Regardless of the number of units in investment properties, lenders like to see successful experiences with real estate investing. For commercial real estate mortgages, you’ll need to provide operating statements of the property in question and rent roll for the past two years. This is in addition to your business tax returns and personal information.

Commercial lenders often require a higher down payment, 25-40%, compared to the 20-30% that lenders typically require for single-family rentals and small multifamily properties.

Comparing Down Payments and Cash Reserves

Let’s crunch some numbers. Let’s say you’re planning on purchasing a single-family home that costs $200,000—you’ll only need to make a down payment of $40,000. Compare this to a multi-family property that costs $500,000—you’ll pay anywhere from $125,000 to $150,000. That’s quite the difference!

Lenders also require that investors have cash on hand to cover a minimum of six months’ worth of mortgage payments for single-family homes and around 6-to 12 months for multi-family ones. If you think about it, even if you were required to have the same number of mortgage payments in cash reserves for both types of properties, the amount you need is almost always higher with a multi-family property.

To take this even further, financing for single-family properties typically has lower interest rates. Commercial real estate loans usually have rates around 2% to 2.5% higher and fewer options when it comes to choosing loan terms.

For multi-family rental properties that qualify, consider an FHA or conforming loan through Fannie Mae or Freddie Mac (get free loan quotes through Credible). Keep in mind that you’ll need to move in for at least a year and house hack — live in one unit and rent out the others.

That way, you can be nearby in case your tenants need assistance or there are issues with the property itself. Plus, you can save on rent (depending on how you price rent for the units, and your tenants could effectively pay for your entire mortgage. Plus, with a 3.5% minimum down payment requirement, you don’t need to save for years to buy your first property.

Factoring in Real Estate Appreciation

Both types of investment properties typically appreciate well, though there’s no guarantee what the market will do in the future. Investors should consider the concept of forced appreciation through repairs or renovations.

While all successful forced appreciation will increase the value of both types of properties, with single-family homes, you’re increasing its value with one unit, compared to multiple housing units for multi-family properties (assuming you’re fixing up the common areas). The BRRRR method works for both types of properties, but you can accelerate your door acquisition and cash flow with multifamily properties.

Again, multifamily properties create efficiency of effort. Think about how much work and capital it would take to force appreciation on multiple single-family homes compared to one multi-family property!

Rental Property Management Challenges

As you build your real estate empire, start building your team, which may include hiring a property manager. The efficiency of adding multiple doors in a single transaction also increases your management needs and labor.

If you do hire out, it may not make sense to hire out for a single-family residence unless you live out of state (or it’s too far for you to drive to). Plus, it can be more costly when you break down the numbers. In most cases, investors must pay at least 10% of the rental income for someone to professionally manage the property, including the occasional new tenant placement fee.

Compare this to multi-family properties. With the higher volume and the possibility of a long-term contract, multi-family investors can often negotiate lower rates, anywhere from 4% to 7% of the rental income. Sure, you’re mostly paying more in dollar amounts, but percentage-wise, it is a better return on your investment.

Besides, you don’t need to spend all that time managing multiple tenants and fixing issues on a much larger property.

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Growing Your Real Estate Empire

When it comes to expanding, single-family homes are easier since getting financing and putting cash upfront to invest is more affordable. However, there might be more work upfront to purchase multiple single-family properties.

For instance, you want to increase your real estate portfolio by another five single-family homes. That’s five separate properties. Don’t forget five different closings (including inspections) and possibly different mortgages. With a multi-family, you purchase one property with five units, and that’s it—one inspection and one mortgage.

Larger multifamily properties could cost more overall for repairs and maintenance, but they still have lower costs per unit compared to single-family homes.

Then, there’s the challenge when it comes to working with a property manager. If you hire someone for all your single-family properties, this person has to worry about driving to multiple locations for showings, routine maintenance issues, and inspections. Assuming you don’t need to hire multiple staff because you own multiple properties in different states.

That said, having a well-diversified real estate investment portfolio can mean having both types of properties, which can help you mitigate risk and increase your potential for more income.

Exit Strategies

When it comes time to sell an investment property, single-family homes are much easier than multi-family homes. That’s because you have access to a larger pool of buyers: real estate investors who want to diversify their portfolio or find an “easier” type of property and retail home buyers who are looking for a home as their primary residence.

In fact, many real estate experts predict that the market for single-family homes will increase—according to the U.S. Census estimates, the number of single-family home rentals grew by 31% from 2007 to 2016, compared to only 14% for multi-family properties.

Compare this to a more limited pool of investors for multi-family properties, which tend to be real estate investors.

The Downsides and Upsides of Single-Family Rentals

I believe I’ve clarified the points in previous sections, but let me simplify each one. Below are what’s expected from single-family rental investments.

Upsides

• • Financing – Inexperienced investors often find these properties more attainable with conventional mortgages.
  • Initial investment – The buy-in cost is typically lower, making it a go-to option for newbie landlords.
  • Property management – With fewer moving parts, it’s easier for DIY landlords to handle maintenance and tenant issues.
  • Tenant stability – Families and long-term renters often gravitate towards single-family homes, which means fewer turnover headaches.
  • Appreciation – Single-family homes in desirable neighborhoods can experience significant value increases. Take note of the keyword desirable. 

Downsides

• • Vacancy impact – When your only tenant moves out, you’re left holding the bag on all expenses.
  • Maintenance costs – There’s no spreading the cost of a new roof or HVAC system across multiple units.
  • Cash flow – The income stream from a single unit may not be as robust as a multi-unit property.
  • Time management – Juggling multiple single-family properties across town can become a full-time job. That kind of defeats the purpose of investing in real estate, in my opinion.

The Downsides and Upsides of Multifamily Units

On the other hand, below are some things you can expect from multifamily rentals.

Upsides

• • Management efficiency – One roof, multiple rent checks—a numbers game that can work in your favor.
  • Cash flow potential – More units under one umbrella can mean a steadier income stream.
  • Acquisition costs – The per-unit cost often decreases as the number of units increases.
  • Vacancy buffer – When you have multiple units, you don’t want to put all your eggs in one tenant’s basket.
  • Portfolio growth – Adding doors becomes easier when they’re all in one building.

Downsides

• • Upfront costs – The sticker shock on multifamily properties can be a hard pill to swallow for many investors.
  • Complex operations – Multifamily investments often have a steeper learning curve — from financing to tenant laws. 
  • Tenant turnover – The revolving door of apartment living can lead to more frequent vacancy periods.
  • Red tape – Multifamily properties often face more stringent zoning laws and regulatory hurdles.
  • Appreciation pace – While steady, multifamily properties may not see the rapid value spikes of single-family homes in hot markets unless they are renovated forcibly.

Questions to Make the Decision

Are you still unsure which is the best option for you personally?

Becoming a real estate investor and choosing the right type of investment property is not a decision to take lightly. Ask yourself a few questions to help cement your decision.

• How much can I afford to set aside as cash reserves?
• What amount can I afford to put as a down payment?
• Am I just starting out, or wanting to expand my real estate investment portfolio?
• Am I willing to manage the property myself?
• Am I more interested in rental cash flow or appreciation potential?
• How much time will I invest in handling different contractors, prosperity managers, and tenants?

Take some time to answer these questions and carefully weigh the pros and cons of both types of properties. That way, you can use the above information to make the best-educated decision that suits your business’s wants and needs. It’ll also help you anticipate any foreseeable challenges and issues as you finance, renovate, and find your first tenant for the property.

It could take some time to find your footing with real estate, but it’ll be worth it when you move forward with confidence.♦

Are you more interested in single-family rental properties or multifamily properties? Why?

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