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Real estate investors—including executives/entrepreneurs who may be new to real estate and looking to develop new revenue streams—often face the decision of whether to invest in single-family homes or multifamily properties when lending money to rental properties. Each has its advantages and disadvantages. Therefore, it is important to carefully consider a number of factors before making any move.
Prioritize goals
First, clearly define your goals and rank them when it comes to investing. If maximizing ROI is most important, consider which property type offers the best potential for rental income and appreciation. Multi-family homes generally perform better here and achieve a higher ROI in the short term. However, single-family homes in certain markets can offer higher appreciation, which can lead to higher long-term profits.
When maintaining or increasing cash flow is the priority, a different perspective is required. Both types of properties have potential here, but single-family homes have shown more reliable growth and their rents have steadily increased by about 3% since 2010. They also tend to attract families who prefer longer rental terms, resulting in smoother cash flow.
However, multifamily housing offers the opportunity to spread the costs of property management, maintenance and utilities, resulting in lower operating costs per unit.
Related: The Entrepreneur’s Guide to Building Wealth Through Real Estate
Assess your experience level
Your experience as an investor and landlord plays an important role in determining which type of property represents a better opportunity. For beginners, it may be better to look for smaller properties, as an apartment building involves collecting various rent payments and maintaining multiple units, which means more communication with tenants. However, newcomers to this process should not ignore smaller apartment buildings (e.g. duplexes and triplexes), as these may be easier to afford and manage than larger buildings.
On average, single-family homes require a smaller initial investment, making them more accessible to inexperienced investors and/or those who have less capital or prefer to invest. Additionally, they tend to attract more financially stable and longer-term tenants, making it easier to collect rent. Duplexes and triplexes offer the best of both worlds: They allow less experienced investors to access multifamily housing at a lower entry point and have the advantage of being able to collect rent from more than one unit. You can even live in one and rent the other.
Not surprisingly, those with more experience are better suited to the complexities of larger real estate investments. In many cases, multifamily properties offer higher cash-on-cash returns. And depending on the market, the rent per unit for multifamily properties tends to be lower than for single-family homes because adding multiple units results in a higher monthly rent. More experienced investors are also better equipped to handle the higher costs (and more difficult barriers to purchase) at this scale, including obtaining a commercial loan and complying with additional regulations.
Related: 3 emerging trends shaping the future of the real estate industry
Think about risk tolerance
Before choosing a property type, consider how much risk you are willing to take (and can afford) and how familiar you are with market volatility, tenant turnover, vacancy rates, financing and regulatory changes.
Single-family homes may have a lower risk of tenant turnover as tenants are more likely to be families or couples who view the rental property as their home and therefore stay longer. However, it is also important to consider the possibility of prolonged vacancies, which can pose a significant financial burden until a new tenant is found. (If a multifamily investor loses a tenant, the rent on the other units can offset the loss.)
There are also risks such as market changes and structural problems in multi-family homes. Diversifying across multiple property types and markets can spread risk and protect investors from the pitfalls of both property types (if one of them struggles, the others can pick up the slack).
Related: Commercial real estate: crisis and opportunities
Determine scalability
If you want to expand your real estate portfolio over time, investing in multifamily properties can be a good strategy, especially if you take advantage of economies of scale. (As the number of units increases, so does the potential for cost savings and income generation.) These are often better deals – offering savings on utility costs and tiered pricing on materials and services for maintenance repairs and home improvement projects, as well as pricing on appliances and household goods. Additionally, managing multiple units within a single property simplifies tasks such as tenant communication, maintenance scheduling, and rent collection.
There may also be cheaper financing options for such properties. Due to their potential for higher rental income and lower vacancy risk, some lenders may offer better interest rates and loan terms, reducing the cost of capital required to scale and there may also be tax benefits. Additionally, purchasing a 20-unit apartment building only requires one due diligence and closing transaction.
Investing in single-family homes also offers scalability benefits. Lower entry points in pricing, flexibility in mortgage loan options and minimal out-of-pocket costs make it easier to strategically expand a portfolio, especially for those with less capital. In addition, it allows for gradual expansion: by purchasing properties one at a time, investors have the flexibility to grow at a more comfortable pace and wait for the right opportunities to arise or for the financial situation to improve. By taking a more gradual approach, they can avoid the need for large capital injections and complex financing structures.
Related: Why real estate investing is the ultimate adventure for entrepreneurs
Measure the time spent
Managing rental properties can take a lot of time. Therefore, it is important to decide in advance how many hours you can (or want to) dedicate. If the goal is minimal effort, a single-family home could be a good option.
Of course, managing two or more units requires more time and effort unless you hire a property management company (which increases operating costs). However, it is still possible to invest in multifamily housing without having to incur the costs of outsourcing tasks such as resident monitoring, payment collection and repairs. There are management technologies available that can streamline and automate most of this – providing more flexibility and resources to diversify a portfolio while keeping the time required relatively low.
These technologies can also open the door to exploring do-it-yourself opportunities, further expanding rental investment options. When you put everything from listing and tenant screening to lease signing and rent collection virtually on autopilot (controlled via a mobile app or other platform), you can manage from virtually anywhere. Such apps can also offer advanced features such as maintenance management, renter credit increase, renter insurance, and accounting.
Related: Get this AI-powered real estate and property management platform for just $200