What type of investment property is best? This question comes up more than any other from long-term buy-and-hold investors. Which is the best investment for your hard-earned dollars, multifamily properties or single-family properties? I never answer this question because the right answer is different for different investors, as there are advantages to both.
Advantages Of Single-Family Properties
For the purpose of this article, single-family means one unit owned and one tenant (or family) living in the unit. It could be a condo, townhome or detached house.
• No tenant-tenant conflicts: The problem I have run into with owning apartments is that eventually the tenants won’t get along. When this happens, it is common for the landlord to get a call from one of the tenants asking for them to get involved. That is a difficult call to take because there really is not much a landlord can do. When I get a call like that, I will commit to sending a letter to the resident about following the rules in the lease and respecting their neighbors, but outside of that, I cannot do much about small grievances.
• Less maintenance: Apartment tenants tend to be are much harsher on the property than those that live in houses. There is also little to no common area to maintain with single-family homes. If there is, such as in a townhome or condo complex, there should already be an association or manager in place to take care of it. Finally, with single-family homes, it is common to have several owner occupants in the complex, or neighborhood, who care about and take care of the property more than a building full of renters.
• Easier to finance: Financing is a tricky subject and can also be an advantage of an apartment, as we discuss later. The money an investor can earn on single-family is the best money out there. It is relatively inexpensive with a long-term and fixed interest rate. In a lot of cases, you can get higher loan-to-value ratios; and if you know how to use hard money as a bridge loan, you can potential buy homes with little or no money down.
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• Diversified across several (local or non-local) markets: When you buy single-family homes, you are likely spreading your money out into different markets or neighborhoods. In Denver, during the Great Recession, I owned houses in areas that dropped 50%. However, I also owned homes in other areas that did not take a price hit at all.
• Liquidity: Single-family homes are much more liquid. Your buyer pool will consist of first-time homebuyers, move-up buyers, downsizing buyers and investors. A larger pool of buyers makes a property much easier to sell, if needed. To some investors, this is the biggest advantage.
Advantages Of Multifamily Properties
I am including all residential property that consists of more than one unit into this category. I have a handful of small apartments in my portfolio, and here is why I like them.
• Easier to manage: This is not always the case — fighting tenants is a good example of when it is not — but overall, having everyone in one location makes managing multiple units easier. In some cases, the building can afford an onsite manager who helps keep it clean, can help show units and meet contractors.
• One roof: Multiple units offer economies of scale. Let’s assume we have a 20-unit building. If I replace one roof, I replaced the roof on 20 units at one time. The same will apply to painting or any number of other maintenance or improvement items. When you do the math, the price per unit is significantly lower than for single-family homes. Your marketing for new tenants or insurance expense are two other examples of economies of scale, and a lower price per unit with multifamily investments.
• Financing: As described above, financing is tricky. A downside to single-family financing is that banks want to limit how many loans you have, which limits the number of rentals you can buy. Multifamily housing allows you to own more rentals with fewer loaned dollars. Commercial loans can have more flexibility on profitable properties, and they typically don’t get reported to your personal credit.
• Cash flow: This is not an absolute, but from the properties I have reviewed or purchased, the cash flow is higher on small apartments, which is obviously a noteworthy benefit for real estate investors.
I don't address appreciation as a benefit for either strategy, as purchasing for appreciation is an exercise in speculation. With that said, some investors will claim that single-family homes tend to appreciate better over time, adding a pro to the single-family property column.
If you believe real estate is a great investment, you could probably see benefits from both multifamily and single-family investments. Keeping an open mind and understanding that they both have their place will help you create a great investment portfolio.