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Real estate investors — including business leaders/entrepreneurs who might be new to real estate and are looking to tap into new income streams — often grapple with the decision between investing in single-family homes or multi-family properties when allocating money toward rental properties. Each has its pros and cons, so it’s vital to carefully consider a range of factors before making a move.
Prioritize objectives
First and foremost, clearly define and rank objectives when it comes to investing. If the most important is to maximize ROI, look at which property type has the best potential for rental income and appreciation. Multi-unit properties generally do better here, giving them a higher ROI in the short term. However, single-family homes can offer better appreciation in certain markets, which can provide higher long-term gains.
If the main priority is to maintain or increase cash flow, a different perspective is required. Both types of properties have potential here, but single-family homes sport more reliable growth, and their rents have grown consistently by about 3% since 2010. They also tend to attract families that prefer longer lease terms, resulting in more consistent cash flow.
However, multi-family properties offer the opportunity to spread expenses like property management, maintenance and utilities, leading to lower per-unit operating costs.
Related: The Entrepreneur’s Guide to Building Wealth Through Real Estate
Assess your experience level
Your amount of experience as an investor and landlord plays a significant role in what property type will constitute a better opportunity. For beginners, it might be better to seek smaller properties, as a multi-family property involves collecting various rent payments and maintaining multiple units, which means more tenant communication. That said, those new to the process should not discount smaller multi-family homes (such as duplexes and triplexes), which can be easier to afford and manage than larger buildings.
On average, single-family homes require a lower initial investment, making them more accessible to inexperienced investors and/or those who have or prefer to invest less capital. Additionally, they tend to attract more financially stable and longer-term tenants, making it easier to collect rent. Duplexes and triplexes provide the best of both worlds: They allow less experienced investors access to multi-family properties at a lower entry point, with the benefit of collecting rent from more than one unit. They can even live in one while renting the other(s).
Those more experienced are, not surprisingly, better suited to the complexities of larger property investments. In many instances, multi-family properties offer higher cash-on-cash returns. And, depending on the market, rent per unit tends to be lower for multi-family units than single-family homes, as collecting from multiple units yields more monthly rent. More experienced investors are also better equipped to navigate the higher costs of (and more difficult barriers to) purchasing at this scale, including obtaining a commercial loan and adhering to additional regulations.
Related: 3 Emerging Trends Shaping the Future of Real Estate
Contemplate risk tolerance
Before settling on one type of property, assess how much risk you’re willing (and can afford) to take on and how comfortable you are with market volatility, tenant turnover, vacancy rates, financing and regulatory changes.
Single-family homes may offer lower risk in terms of tenant turnover because those who rent them are more likely to be families or couples who treat a rental as their home and so stay longer. That said, it’s also important to consider the potential for long vacancies, which can cause a significant financial burden until a new renter is found. (When a multi-family investor loses a tenant, rent from the other units can offset the loss.)
There are risks when it comes to multifamily properties, too, such as market changes and structural issues. Diversifying across multiple property types and markets can spread risk, insulating investors from the pitfalls of either property type (if one has issues, the others can balance things out).
Related: Commercial Real Estate: Crisis and Opportunities
Determine scalability
If you want the ability to ramp up a real estate portfolio over time, investing in multi-family 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 can often be better deals—offer savings on utilities and bulk pricing on materials and services for maintenance repairs and home improvement projects, as well as pricing on appliances and home goods. Additionally, managing multiple units within a single property simplifies tasks like tenant communication, maintenance scheduling and rent collection.
Such properties can also attract more favorable financing options. Thanks to their potential for higher rental income and lower vacancy risk, some lenders may offer better deals on interest rates and loan conditions, reducing the cost of capital needed to scale, and there may be tax benefits as well. Furthermore, acquiring an apartment building with 20 units only requires one due diligence and closing transaction.
There are scalability advantages to single-family investing as well. Lower entry points in pricing, flexibility in mortgage loan options and minimal out-of-pocket expenses make it easier to strategically expand a portfolio, especially for those with less capital. Additionally, it allows for incremental expansion: By acquiring properties one at a time, investors have the flexibility to grow at a more comfortable pace, waiting for the right opportunities to arise or for a financial situation to improve. Using a more gradual approach, they can avoid the need for large capital infusions and complex financing structures.
Related: Why Real Estate Investment is the Ultimate Adventure for Entrepreneurs
Gauge time commitment
There can be considerable time involved in managing rental properties, so it’s important to decide ahead of time how many hours you have (or want) to devote. If the goal is minimal commitment, a single-family home might be a good option.
Managing two or more units, of course, requires more time and effort unless you hire a property management company (which adds to operational costs). However, it’s still possible to invest in multi-family properties without having to assume the costs of outsourcing tasks like resident screening, 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 time commitment relatively low.
These technologies can also open the door to exploring do-it-yourself opportunities that further widen options regarding rental investments. Putting everything from listings and tenant screening to lease signing and rent collection essentially on autopilot (controlled via mobile app or other platform) can allow you to manage from virtually anywhere. Such apps can also offer advanced functionality like maintenance management, credit boosting for tenants, renters insurance and accounting.
Related: Get This AI-Powered Real Estate and Property Management Platform for Only $200