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The Great Debate: Single Family vs. Multifamily Investment Properties

February 23, 2023
Article

Risk vs. Reward

Single-Family vs. Multi-Family Real Estate Investments

Single-family rentals:

Financing: Financing for single-family rentals is often through traditional mortgage or second home loans.

  • DSCR Loans are also an option, however, ratios are generally more difficult to reach in comparison to a multi-family property.
  • Other financing options: Seller Financing, Land Contract, etc.

Cash Flow: A medium to high equity position can justify the cash flow of a single-family rental if the aspects of an easier future sale are more appealing. However, multi-unit properties generally offer more cash flow potential.

Property Management: The cost of property management for a single-family rental is usually higher on a per-unit basis than for a multifamily rental.

Maintenance for a single-family rental is typically the owner’s responsibility and can be costly, especially for more extensive repairs (Roofs, Furnace, Foundations).

Vacancy: A single-family rental has a higher risk regarding vacancy compared to a multifamily rental, as the owner is relying on one tenant to pay the rent.

Inventory: There are generally more single-family rental options than there are multi-family properties. 

Exit Strategy: The buyer pool for a single-family rental sale is large since it caters to most home buyers and potentially investors.

Multifamily rentals:

Financing for multifamily rentals up to 4-units can be residential loans or commercial loans. 

  • DSCR Commercial Loan
  • Second-home loans

Cash Flow: There is generally more cashflow opportunity in multi-unit properties compared to single-family rental properties.

Property Management: The cost of property management for a multifamily rental is usually lower on a per-unit basis than for a single-family rental. More units will of course increase your overall spend on management.

Maintenance for a multifamily rental can be less expensive (per unit) than for a single-family rental, as the cost can be spread across multiple units.

Vacancy: A multifamily rental has a generally lower risk regarding vacancy compared to a single-family rental, as the owner is less reliant on each individual tenant. 

Exit Strategy: The buyer pool mainly caters to investors and owner-occupants.

Basic Residential Investment strategies:

  • Buy, Rehab, Rent, Refinance (AKA the BRRR Strategy)
  • Buy and rent
  • Fix and flip
  • House-hacking

Basic metrics:

1% Rental Rule

  • Monthly rent income is 1% of the purchase price.
  • Example: $200k house renting for $2,000/mo

70% Flip Rule

  • The property’s ARV (after-repair value) is to be no more than 70-75% of the property purchase price minus the cost of renovations.