Single-Family vs. Multi-Family: Which Is Best for You?

In the U.S., single-family homes comprise over 60% of the housing supply, but does that make them the best investment for your portfolio? With 12,438 multifamily properties reported as of fiscal year 2023, some investors argue that these offer better opportunities. If you've spent time on real estate forums or listened to real estate podcasts, you've likely heard that multifamily homes are the way to go.

The appeal of multifamily investments is clear. They offer economies of scale, diversified tenant risk, and the potential for higher cash flow. But is it really that simple? Single-family homes comes with their own set of advantages that investors shouldn't overlook. Many tenants prefer the privacy and space of a house, which can lead to longer-term, happier renters — and less turnover.

The reality is that both single-family and multifamily properties have their pros and cons. Your ideal investment strategy depends on various factors, including your financial goals, risk tolerance, and management preferences. Let's explore the key considerations for each property type to help you shape the right real estate strategy for your portfolio.

Overview of single-family homes

Single-family homes are houses meant for one family to live in. They stand alone and don't share walls with other homes. These houses usually have the following:

• Their own piece of land.
• A private entrance directly from outside.
• Separate utility connections.

Real estate investors buy each home as a separate property to buy, sell, or rent out. Each single-family home has an individual lease agreement.

Overview of multifamily properties

Multifamily homes have units that share walls and house separate occupants. Each unit has a separate individual lease. These properties range from duplexes with two units to large apartment buildings. These properties have the following:

• Common walls between units.
• Shared areas like hallways and stairways.
• Separately metered or shared utilities, depending on the property.

A multifamily investment property can fall under either residential or commercial real estate investing, depending on the size:

• Residential real estate: Properties with four or fewer units, including duplexes, triplexes, and fourplexes.
• Commercial real estate: Multifamily dwellings with five or more units.

Advantages and disadvantages of single-family home investing

Investors looking to buy residential real estate need to be aware of the pros and cons of single-family homes.

Advantages

Many real estate investors begin with single-family homes since they are easier to get started and offer many advantages, like the following:

Appreciation potential

Single-family homes can appreciate faster than multifamily properties. This is because there's a bigger market demand due to a larger pool of potential buyers, which includes both homeowners and investors.

This broader appeal can drive up single-family real estate prices more quickly, especially in desirable neighborhoods. Homeowners compete for these properties and are willing to pay a premium for their dream homes. This emotional factor can boost values beyond pure investment calculations.

As Brad Case, chief economist at Middleburg Communities, recently noted, "Investors are willing to pay a premium for single-family rental housing, especially in U.S. Southeastern states, because that property type offers outsized growth potential."

Tenant quality

Single-family rentals attract families and professionals looking for a home-like environment. These tenants often prove to be financially stable and treat the property with greater care, which is ideal for rental property owners.

Renting to responsible occupants who follow policies and who handle basic maintenance reduces your management responsibilities. They're often more self-sufficient, handling minor issues without constantly calling you. This saves time and improves overall cash flow by minimizing repair costs.

Lower turnover

Great tenants in single-family homes tend to stick around, often renewing their leases multiple times. This long-term occupancy benefits landlords because it reduces turnover costs. You'll spend less on marketing, you’ll reduce vacancies, and you’ll minimize expenses for property prep between tenants.

Easier financing

Single-family properties are easier for real estate investors to finance. You can use conventional mortgages, which offer lower interest rates and down payments compared to the commercial loans required for multifamily homes.

Lenders often view single-family homes as lower-risk investments, leading to better loan terms and a more straightforward approval process with less paperwork. This accessibility opens doors for new investors to enter the market more easily than they would with a multifamily building.

Exit strategy flexibility

You should always consider your exit strategy when investing. Single-family homes offer more flexibility in this area. Your pool of potential buyers is larger, as you can sell to both investors and families looking for a place to live.

Different market conditions can suit various exit strategies. In a hot market, you might sell to a homeowner for top dollar, while during a downturn, you could sell to another investor seeking rental properties. You also have the option to refinance and hold on to the property for long-term gains.

Single-family homes let you sell part of your portfolio without affecting your other properties, which isn't possible with multifamily buildings. You can also use creative strategies such as rent-to-own or owner financing.

Disadvantages

There are some drawbacks to single-family homes for residential property investors. Areas to keep in mind include the following:

Single income stream

If your tenant moves out, you're looking at a total loss of rental income. Compared to multifamily homes, you don't have other units to help cover your ongoing costs. That means you'll have to pay the mortgage payments, property taxes, insurance, and any maintenance without any rental income coming in.

Maintenance responsibility

Single-family homes come with individual maintenance costs for each property. You're responsible for HVAC, roofing, and other systems without the economies of scale you'd get with multifamily properties.

Single-family home investors may rely on third-party maintenance services, while larger apartment buildings often have on-site maintenance staff. This can lead to scheduling delays and higher costs.

Scale limitations

Building a large portfolio takes longer with single-family homes. You'll need to research each home individually and understand its specific market, repeating the due diligence process for every property. This involves multiple transactions, each requiring its own inspection, financing, and closing process.

These factors increase your time investment and transaction costs, making scaling up slower than buying a multifamily property in one transaction.

Advantages and disadvantages of multifamily home investing

If you want to expand your portfolio, it's a good idea to consider multifamily real estate investing before you keep buying multiple single-family homes. As with all real estate investing, there are pros and cons to review as part of your decision.

Advantages

Buying a multifamily home offers unique benefits that provide greater scale with multiple rental units in one place. These key advantages include the following:

Diversification of tenant risk

With multifamily properties, you're not putting all your eggs in one basket since you're spreading out your tenant risk. If one tenant decides to skip town or stops paying rent, you're not left high and dry.

Tenant turnover doesn't hit quite as hard. You can focus on filling one vacant unit while still collecting rent from the others. This allows you to find the right tenant without feeling pressured to fill the vacancy immediately.

Professional property management

Hiring a property management company becomes financially viable when you have multiple rental units under one roof. With a single-family home, the cost of a property manager might take most of your profits. But if you spread that cost across multiple units, it can make more sense.

A property manager handles everything from tenant screening to maintenance calls. They're on the front lines dealing with day-to-day issues, which means you're not getting 2:00 AM calls about clogged toilets. With a management team in place, you can more easily grow your investment portfolio since adding another property to your portfolio doesn't mean doubling your workload.

Easier to scale

Multifamily properties allow you to expand your unit count faster with fewer transactions. Buying a 10-unit apartment building adds 10 doors to your portfolio at one time, compared to purchasing 10 separate single-family homes.

This efficiency saves time and money. Each property transaction includes its own set of costs, like appraisals, title searches, and closing fees. With a multifamily purchase, you consolidate all these expenses for one building.

Disadvantages

Some of the cons of multifamily commercial properties include the following:

Higher initial investment cost

Multifamily homes cost more, which can be a major hurdle for new investors or those with limited capital. Lenders require a downpayment of 20-30%, tying up a lot of money. This can limit your ability to diversify investments or capitalize on other market opportunities.

Financing is also more involved. You'll need commercial loans to buy properties with five or more units. This financing path involves stricter qualification requirements and higher interest rates than residential loans. These factors can affect your cash flow and overall returns, especially in the early stages of your investment.

Complex management and operations

Managing a multifamily property is more involved than overseeing a single-family rental. The increased number of units and tenants adds layers of complexity to your operations. Here's why:

• Multiple tenants: You have more lease agreements, a higher number of maintenance requests, and potentially more conflicts between tenants.
• Increased maintenance: With more units, you'll have more maintenance issues. A single problem, like a roof leak or HVAC failure, can affect multiple units at once. This can complicate repairs and potentially lead to a surge in tenant complaints.
• Tenant turnover: When one unit becomes vacant, you need to clean, repair, and market it while continuing to manage the occupied units. This juggling act can be time-consuming and stressful, especially if multiple units become vacant around the same time.
• Legal compliance: Multifamily properties can have stricter regulations in areas like fire safety requirements and building codes.
• Financial management: You're tracking multiple rent payments, managing a larger operating budget and expenses, and dealing with more complex tax situations. This means you'll need more sophisticated accounting systems and potentially the help of a professional accountant.

Longer selling process

Selling a multifamily property often takes more time and effort compared to single-family homes. This is because the pool of potential buyers for multifamily properties is smaller. This narrower market can mean longer listing times and potentially more involved negotiations.

Streamlining property management

No matter which route you choose — single-family vs. multi-family — using property management software like Azibo can help optimize your operations and increase overall profitability. Azibo's integrated platform allows you to do all of the following in one place:

• Accept rental applications: Streamline your tenant screening process by collecting and reviewing rental applications online. Customize application forms and easily compare multiple applicants side by side.
• Screen tenants: Run thorough background checks, including credit reports and eviction history. This helps you make smarter choices about potential tenants so you can reduce your risk of payment issues or property damage.
• Collect rent: Accept online payments from tenants through various methods, including ACH transfers and credit cards. This automated system increases the chances of timely rent collection and provides a record of all transactions.
• Streamline accounting: Automatically track income and expenses and categorize transactions for easy tax preparation. Generate financial reports at the click of a button, giving you a picture of your property's performance.
• Manage your finances: Access real-time financial data and cash flow insights for all your properties in one place. Set up automatic bill payments and track expenses easily, helping you stay on top of your investment's financial health.
• Handle maintenance: Allow tenants to submit maintenance requests online through a user-friendly portal. Easily track and manage repairs and keep a detailed record of all maintenance activities and costs.
• Document storage: Securely store and organize all important property-related documents online for easy access and retrieval. This feature streamlines your record-keeping process and makes it easy to access the information you need about your investment properties.

Differences between multifamily and single-family homes

Success in real estate investing comes down to research, financial planning, and effective management. Both single-family and multifamily housing offer unique advantages and challenges. The best choice depends on your individual goals, resources, and risk tolerance.

Single-family homes can provide easier entry into real estate investing, potentially higher appreciation, and often attract long-term tenants. Multifamily residential properties offer diversification, economies of scale, and the potential for greater cash flow.

There's no one-size-fits-all approach to real estate investing. Many successful investors incorporate both single-family and multifamily homes into their portfolios to balance risk and maximize returns. The key is to start with a clear strategy, stay informed about market trends, and prepare to adapt as your investment portfolio grows.

Single-family vs. multifamily: FAQs

What is the 1% rule for multifamily?

The 1% rule for multifamily properties states that the monthly rent should be at least 1% of the property's purchase price.

What is a single multiple home?

A single multiple home is a property that houses multiple families, such as a duplex or apartment building, with separate living units for each family.

Why should you buy a multifamily first?

Buying a multifamily home first allows you to "house hack.” This means you live in one unit while renting out the others, helping to cover your mortgage and reduce your living expenses. It's a great way to build equity quickly, gain property management experience, and see potential tax benefits.