Multi-Family or Single-Family?

In this article we compare and contrast multi-family properties vs. single-family properties as investments.

No Simple Answer

There is no simple answer to the question, "Is multi-family or single-family a better investment?" We believe that the property type is not important. What is important is whether the property meets the following criteria:

  • Sustained profitability.
  • Likely to appreciate over time.
  • Located in an area with acceptable business risk.

The property that best meets the above criteria is the property you should buy. Also, the best property may change over time even in the same location. The best buy today may be a single family and a month later a multi-family. Let the numbers be your guide on property selection, not any pre-conceived bias.

Objective Differences

The following table shows some of the more objective differences between single-family and multi-family. Note that the comparison is based on a four-plex or less. If there are more than 4 units, the transaction requires commercial financing, which is a more complex and expensive proposition.

 Single FamilyMulti Family
Financing20% downIf 4 units or less, 20% down
Primary market value determinationMarket value of similar homesCap Rate
Vacancy considerationAll or nothingIncremental - Each unit is a separate residence
Cost to rentOne feeEach unit costs the same a single family home
Market competitionOther single family homesCondos and apartments
Typical tenantFamilies with childrenIndividuals or couples without children
Tenant stabilityVery stable due to childrenLess stable, nothing ties them to the location
Future buyerHome buyers or investorsOnly investors
Maintenance cost$$$$

Subjective Differences

  • Appreciation - While you would never buy a property solely for appreciation, appreciation is desirable. With single-family properties, the resale value is the single family market value or the cap rate, which ever is higher. With multi-family, appreciation is largely based on the Cap rate since the only buyer is another investor. The cap rate only increases if Rents / Recurring Costs increases.
  • Vacancy Rate - Tenants for single-family properties typically come from a very different pool than multi-family properties. For multi-family properties, condos and apartments are direct competition. With single family homes, only other single family homes are competition.
  • Property taxes - The rate for single-family taxes might be different than for multi-family.
  • Tenant interactions - Single-family homes are typically more isolated than multi family. Thus, the odds of conflict between tenants in a multi family are higher than a single family property.

In Summary

We do not believe that the type of property matters. What matters is satisfying the three property criteria. Always look for the best property, do not let pre-conceived bias cloud your selection.