The pros and cons of single- and multi-family investing

by Ryan Rose05 Aug 2019

The question of whether to purchase a single-family investment property or a multi-unit property often results in the noncommittal answer: “it depends”. Both single-family and multi-family properties have their benefits and challenges. RCN Capital explores the advantages and disadvantages of these types of properties in a recent blog post.

Single-family properties
Single-family houses are an easier place for investors to begin the investment journey, according to RCN. The challenges of saving for a down payment on an investment property is challenging enough, and it takes less time to gather the cash for a down payment on a single-family property. In most markets, there is also a higher inventory of single-family houses (although that seems to be changing in some locations).

With single-family units, it’s also easier to scale your business slowly, allowing you to steadily add rental units to your portfolio without giving up your day job and main source of income. It can also be easier to slightly decrease or increase your portfolio while simultaneously increasing liquidity, making it easier to sell a few units to access capital.

It’s easier to choose a single-family property simply because there are many more available nationwide. The National Multi-Family Housing Council states that there are 684,000, 5+ unit properties in the U.S. In comparison, there are 56.3 million single-family homes and 2.6 million 2-4 family homes. This means that combined, there are 82 times more options for 1-4 family properties than 5+ unit properties.

Single-family units also have more flexibility when it comes to financing options, and there are more financing options available. Stronger financing options allow you higher leverage and lower interest rates for the most part. You have options to use conventional financing, hard/private money or cash for purchase depending on your scenario and borrower profile.

Multi-family properties
Multi-family properties can be easier to manage. With larger unit numbers, there are more resources dedicated to that one building. This also means that your portfolio can cover a smaller geographic area, which limits the challenges of having multiple issues arise in different locations.

Multi-family properties also allow for more consistent cash flow. Vacancy in single-family property means you have a non-performing asset, and the strain of mortgage payments quickly drains your cash reserves. With multi-family units, you can still break even or be cash flow positive if there’s a vacancy in one unit. Transitional tenants or other minor fluctuations affect your bottom line less with a multi-family property than they do with a single-unit property.

Growth is also much faster with multi-family properties. There is less work to add a multi-unit/multi-family development than adding individual single-family houses. There’s “less paperwork, less time, and less effort,” RCN writes. It might be somewhat more difficulty to find multi-unit properties but when you locate it, you can close it in one deal rather than several deals.

Multi-family properties are easier to sell than your entire portfolio of single-family residences.

“Selling off larger parts of your portfolio to increase your liquidity is easier with multi-family housing,” said RCN. This can be true at most levels. “A 5-unit property should be easier to sell than 5 single-family houses,” RCN writes. “The disparity only grows larger as the number of units in each portfolio grows larger.”

Commercial properties are usually valued on an income-based approach, meaning the property value is tied to its rental income, as opposed to being related to how similar properties are selling in the area. These income-based valuations protect you from drastic market fluctuations.

With multi-family properties, you have one property and one loan. This also means less paperwork, less to remember, less to keep track of. “Having all your units within one, or a few properties, may help make it easier for you to keep organized,” RCN writes.

It’s not an easy question, and indeed, there isn’t always an easy answer for an investor trying to decide where to start. The answer, then, is to use a company or a partner with a lot of experience in your desired area that can help guide you along.