Last week, I was talking to an experienced real estate investor who owns several single-family rental homes.
And although he loves his little houses, he was quick to admit that there are downsides to single family, especially if you play landlord yourself.
So today I want to compare and contrast single-family and multifamily. Spoiler alert: I believe that passively investing in multifamily properties is the better choice for most investors.
Let's start by looking at some challenges of single-family rentals before we explore why multifamily often comes out on top.
Single-Family Considerations
While single-family properties have their place, they present challenges, especially for investors looking for truly passive income:
Higher vacancy risk – a single-family home is either 100% vacant or 0%, there’s no in between
Higher property management costs – single-family property managers often upwards of 10% of rents compared to 3-6% for multifamily
Temptation to self-manage – because professional property management fees eat into your income, investors are often tempted to self-manage, at which point it’s no longer a passive investment
Harder to scale for significant cash flow – it’s challenging to get to 100 units when you only buy one at a time
That said, single-family homes do offer easier entry for beginners and potentially more liquidity when it's time to sell, so it’s not all negatives.
Now, let's dive into the advantages that make multifamily properties stand out.
Why Multifamily Shines
Stable Cash Flow
Multiple units creates a more reliable income stream since vacancy in one or even several apartments doesn't halt your entire cash flow. Example: in a 100-unit building, even with 10% vacancy, you're still generating income from 90 units. This resilience is particularly appealing for those seeking steady, passive income.
Economies of Scale
When you have numerous units under one roof, operating costs can be spread across more revenue-generating spaces. This applies to everything from property management fees to maintenance expenses. Replacing one roof on a 20-unit building is more cost-effective than replacing the roofs on 20 individual homes.
Operational Efficiency
Managing a single property with multiple units is inherently more efficient than overseeing numerous single-family homes spread across a city. This centralization simplifies property management, maintenance, and tenant interactions, which reduces overall operating costs and drives higher cash flow.
Financing Advantages
Lenders often view multifamily properties more favorably. Why? The diversified income stream from multiple units reduces risk, leading to more favorable loan terms. For passive investors in syndications, this is a notable benefit, as it allows the deal sponsors to secure more attractive financing, translating into higher cash flow for the passive investors.
Forced Appreciation
One of the most compelling aspects of multifamily investing is how the properties appreciate. Unlike single-family homes, which are largely valued based on comparable sales, multifamily properties are valued based on the income they produce. This means that strategic improvements and efficient management can directly increase the property's value, a phenomenon known as forced appreciation.
And further, multifamily properties offer a natural hedge against inflation. Rents are often adjusted annually (on lease renewal), and with multiple units, adjustments can be made throughout the year. This not only protects your investment but can lead to significant wealth accumulation over time.
So what if you want the benefits of multifamily but don’t want the hassles of direct ownership? This is where syndications come into play.
The Syndication Advantage
If you appreciate the benefits of multifamily but don't want to find, buy, and manage properties directly, real estate syndications offer an excellent, 100% passive solution. By investing in a multifamily syndication, you can gain the financial benefits of owning large, professionally managed multifamily assets without the day-to-day headaches responsibilities of property ownership.
You’ll leverage the expertise of experienced operators while enjoying the passive income and (probable) appreciation of multifamily properties. It's a way to access larger, potentially more lucrative deals that might be out of reach completely on your own.
Wrapping Up
While both multifamily and single-family investments have their places in a diversified real estate portfolio, multifamily properties offer distinct advantages for investors seeking truly passive cash flow, efficient operations, and long-term wealth preservation.
As always, due diligence is crucial. Whether you're considering a single-family rental or a multifamily syndication, thoroughly research the property, market, and, in the case of syndications, the sponsor team.
P.S. If you're interested in exploring multifamily investment opportunities or have questions about how they might fit into your investment strategy, don't hesitate to reach out. Let's discuss how we can align your investment goals with the robust benefits of multifamily real estate.