comparing single-family rentals vs multifamily properties

Single- Family vs Multifamily Investing

Posted by Grant Cardone

How well do single-family homes hold up to multifamily properties as a real estate investment? Compare key factors on each to decide.

Whether you’re new to real estate investing or have several deals under your belt, you may be wondering which type of investment is right for you: single family or multifamily. The answer to that depends a lot on your long-term investment strategy and your current financial situation.

We’re going to cover the different aspects of both property types below so you can decide for yourself which types of investments you choose to make.

Cost of single-family homes vs multi-family properties

Some investors think that single-family rental investments are attractive because of their low purchase price compared to multifamily properties. The lower cost of single-family properties makes it easier for investors to get started and to continue purchasing new properties.

However, sometimes the cost per unit is typically higher for single-family than multifamily investments.

Depending on their size, multifamily properties can get quite expensive. The higher cost of multifamily properties compared to single-family homes makes it difficult for many investors to invest in multifamily deals.

When you consider the cost per unit, however, multifamily properties typically come out ahead. In many cases, the lower cost per unit can provide the investor with a higher return.

Larger multifamily properties are often too expensive for new investors, though. Smaller multifamily properties (2-4 units) can provide a real estate investor with a great opportunity to get started with a multifamily purchase. In many cases, a two- or three-unit property may not cost much more than a single-family rental.

Managing the property

With real estate investing, there is much more to success than just making the right purchase. Property management plays a huge role in the success of an investment.

On a per-unit basis, multifamily properties are typically easier to manage. Multiple tenants share the same roof and many mechanical items.

If you have an eight-unit property, you only have to replace one roof, mow one lawn, and visit one property. By comparison, with eight single-family properties, you have eight roofs to replace, eight lawns to mow, and eight properties to visit.

You'll likely find that the fee for a property manager is less with multifamily than with single-family rentals, too – mainly for the same reasons mentioned above.

On the other hand, while multifamily properties might be simpler to manage, many investors find that they have better tenants in their single-family rentals. These tend to be longer-term tenants who take overall better care of the property.

Financing for single family vs multifamily properties

Almost every bank offers single-family real estate loans, and the process for obtaining those loans is pretty standard. With so many options available, it’s often easier to get a mortgage loan on a residential real estate property.

Multifamily properties, on the other hand, are considered commercial, requiring a different type of loan with a different underwriting process. Since it’s a commercial loan, there are fewer banks offering loans for multifamily properties, and these loans can be difficult for new investors to obtain until they have more experience with investment properties.

But even so, banks are more competitive with interest rates with larger deals. Lower interest rates can make a multifamily property an attractive investment.

Property value

One of the key differences between single-family and multifamily properties is how they are valued. No matter what the income is on a single-family home, they are almost always valued based on comparable sales of other homes in the area. Rental income normally doesn't play much of a role in the value of a single-family rental.

The value of any multifamily property is almost entirely based on the cash flow. The market will determine an expected rate of return on a multifamily property, which will determine that property's value.

One common method of determining the value of a multifamily property is using the capitalization rate, or “cap rate”. Simply put, a cap rate is the -ratio between the net operating income the property produces and the original capital cost or alternatively the current market value of the property.

For example, if a property cost one-million dollars and it generated a net profit of one-hundred thousand dollars per year, the cap rate would be ten percent. Ten percent of $1,000,000 is $100,000.

Using that same property and the same net profit of $100,000, we can plug in different terms. If the expected cap rate in a particular market is eight percent, the property’s value would then be higher: $1,250,000. The equation is $100,000 / .08 = $1,250,000.

Net Operating Income (NOI) / Cap Rate = Property Value.

The value of multifamily properties isn't impacted as much during downturns in the real estate market. Since they’re mostly appraised based on income, the property value stays relatively stable. In fact, multifamily properties tend to do even better when the housing market is suffering.

Growing your real estate portfolio

The goal of investing in single-family homes and multifamily properties is the same, and that’s to make money. Growing your real estate investment portfolio is important with whatever type of property you invest in.

Multifamily properties may grow your portfolio much more quickly than single-family rental properties. Every multifamily property you purchase increases the total number of units at a much faster rate than with single-family rentals.

With the economies of scale, the more units you own, the more profitable each one becomes. When you grow your portfolio with multiple units at a time, your cash flow increases at a much higher rate.

Exit strategies

If you plan to cash out on your investments one day, you're going to have to find somebody to buy them. There are plenty of real estate investors that are interested in buying multifamily properties as well as investors that will buy single-family rentals.

However, a large portfolio of single-family rental properties can be difficult to sell. Most investors capable of purchasing a large portfolio of homes are most likely investing their money into multifamily investments. This would leave you trying to sell your properties off in smaller chunks or just one at a time.

Multifamily properties are always in high demand. When it comes time to sell, you’ll likely find several investors ready to write an offer on your properties. These buyers are typically sophisticated and capable of closing a transaction easily.

The bottom line

There are many other factors to consider when deciding on a single-family vs multifamily investment. One of the easiest ways to become a successful real estate investor is invest with somebody else who is already successful. You should always check with your finance or tax professional before making an investment.

Grant Cardone has built a multifamily real estate portfolio worth almost $2 billion that provides positive cash flow.

You can speak to someone about becoming a Cardone Capital investor by scheduling a call by clicking here.

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