Making the decision to invest in rental properties is a big step, but it isn’t the only choice you’ll be facing when starting out in the real estate industry. Once you’ve decided that you’re going to purchase an investment property, the next decision is what type of property suits your needs better—single family residential or multifamily residential.
If you ask any real estate mongrel which investment type is better, you’re unlikely to get a straightforward answer. That’s because both forms have their own pros and cons—and to make a decision on which is best suited for your needs and long-term goals you need to evaluate both completely.
Single Family House Pros
Single family house (SFH) investments are considered to be the steadiest of the industry. Even with all the ups and downs the real estate market can face, there will always be a need for single family houses.
From an investor’s point of view, purchasing a single family home is more affordable than most other real estate investment purchases. They’re easier to gain financing for, allowing investors to purchase homes faster and with less up front than purchasing a larger property type. They’re also easier to acquire more of, over time, giving investors a better chance at building a bigger portfolio.
In addition to being cheaper, single-family homes are generally easier to rent as most people would prefer to live in a house versus an apartment. They also provide better exit options. There aren’t nearly as many buyers for a multi-family unit on the market as there are for single-family homes. Instead of just merely being able to sell to an investor, you are able to sell to investors, families, individuals, and more. You also have the option to sell on a lease—if you have reliable, long-term tenants who are interested in the home, you can opt to set up an arrangement for them to purchase the home directly from you.
Single Family House Cons
If you’re looking for quick and large-scale growth, single family homes probably aren’t the best choice. While they’re easier to acquire, it does tend to take more time. If slow and steady isn’t something you’re interested in, you may want to consider a larger-scale investment.
When it comes to managing them, SFHs are generally more expensive. A property management company will often charge a management fee of 10% or more of the rental price. A property management fee for an apartment complex will generally run around 4-7%.
In addition to costing more in terms of management, single family homes have a different vacancy percentage. If your SFH experiences an idle period—a period without a tenant—then you have a 100% economic loss. If you have a multifamily property and experience an idle period in a unit, you still have other units to help foot the cost of the property.
Multifamily Property Pros
If you’re looking to acquire a large quantity of units, a multifamily property will allow you to gain a larger number of units in one transaction, making growing your investment portfolio faster and with less transactions than if you were attempting the same with SFHs.
In the opposite from SFHs, multifamily properties are generally cheaper to manage. Most multifamily property owners hardly even notice the property management fee as the incoming revenue is much higher than an SFH. Hiring an experienced, professional property management team to handle the property allows the property owner to be much more hands-off than with a SFH.
Multifamily Property Cons
When compared to SFHs, purchasing a multifamily property is more expensive. It can take longer to get into the industry as the purchase prices are so much higher, and often, they’re hard to find financing for.
Even after you’ve secured funding—whether cash or financing—finding a decent property on the market can be difficult. They’re not as easy to come across as a SFH.
It’s Ultimately Your Choice
Regardless of who you talk to and what the numbers say, the choice in which type of property you go with is ultimately up to you. Do your research, run your numbers, and find the investment that works best for you and your needs.