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.
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 Family||Multi Family|
|Financing||20% down||If 4 units or less, 20% down|
|Primary market value determination||Market value of similar homes||Cap Rate|
|Vacancy consideration||All or nothing||Incremental - Each unit is a separate residence|
|Cost to rent||One fee||Each unit costs the same a single family home|
|Market competition||Other single family homes||Condos and apartments|
|Typical tenant||Families with children||Individuals or couples without children|
|Tenant stability||Very stable due to children||Less stable, nothing ties them to the location|
|Future buyer||Home buyers or investors||Only investors|
- 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.
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.