Deciding between a multi-family or single-family investment? There is an unlikely winner.

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At the start of their real estate investing career, most investors first think of buying a single-family property (whether it’s a house or a condo) and renting it out. Most people gravitate towards this because it’s conceptually simpler. After all, people usually have some level of experience buying and selling goods (or, at least, they know someone who does). It’s familiar.

Multifamily, however, is an entirely different story. Few people have experience buying an apartment building, and even fewer are responsible for it. Also, initially, multi-family ownership seems more expensive and more complicated.

Initial appearances, however, can be deceiving. How do multi-family and single-family investing compare? Both have their pros and cons, but usually, in the long run, multifamily wins. Here’s why and what else you need to know about this aspect of real estate investing.

Related: This is why you should invest in real estate now

Why is multifamily better?

There are several reasons why multi-family real estate investments tend to be better: income reliability, quantifiable appreciation metrics, scalability, and economies of scale.

Income reliability
The benefit of income reliability is inherent in the property types themselves. As the type suggests, a single-family home is often owned by a single family. If that family can no longer pay their rent or decides to move out, your income stream collapses. But you’re still on the hook for all the bills. You can’t tell your bank, “The tenants haven’t paid so I don’t have to pay you!”

With multi-family properties, just as it is sometimes difficult to achieve 0% vacancy all the time, it is just as unlikely that you will achieve 100% vacancy. Some people will still be tenants in the building, which means you will have income to help cover your expenses. Multi-family units are rarely in a situation where the owners have no income to pay their expenses. This makes it a less risky and more stable investment overall.

Forced appreciation

Second, multi-family real estate has more quantifiable measures of appreciation. Usually, the value of a multi-family building is directly proportional to the income it generates. A building that can generate $1 million in revenue per year will naturally be much more valuable than a building that brings in $10,000 per year. If you are a multi-family investor, you have the ability to force a property’s appreciation to increase asset income through operational efficiencies, renovations, and marketing strategies to increase property value.

On the other hand, single-family homes are at the mercy of property “comps” in the same neighborhood, general supply and demand, and other market conditions completely beyond an investor’s control. These are all things that will directly impact the resale value of your home in ways that are hard to quantify.

Economies of scale

Investors will benefit from cost savings per unit when it comes to multi-family investing. Economies of scale are called the cost advantages that firms get when production becomes efficient. In other words, there are cost savings per unit due to greater size or quantity produced. When considering buying apartments, outsourcing rehabilitation projects, maintenance and cleaning companies will be less expensive due to the larger number of units.

Scalability

Investing in multi-family real estate allows investors to grow their portfolio faster than with single-family homes. Buying and maintaining 20 single-family homes would be less efficient and less profitable than buying and operating a single 20-unit property. Would you rather have 20 different mortgages and investment strategies or just one?

Related: How to get started in passive real estate investing

Aren’t multi-family investments prohibitively expensive?

When you think of multi-family buildings, the first ones that might come to mind are large apartments. These buildings are usually worth millions of dollars, and some of them can even reach billions.

This is usually too much to put into a single project for individual investors. How, then, are multi-family investments even possible for individuals?

The answer lies in real estate syndications. When you see an apartment complex or an office complex, chances are a group of individuals own the building. An investment organizer, called a general partner (or syndicator), finds the building, operates it and maintains it. The general partner presents the investment opportunity to the limited partners (or passive investors). These partners have nothing to do with the building except to write the initial investment check and collect their monthly distributions and eventual profits when the building sells.

Limited partners can invest as much or as little as the general partner allows. Most of the time, investment minimums are around $25,000 to $50,000. Sometimes they can be higher. Owning real estate for as little as $50,000 is a bit cheaper than buying a single family home in many places. Therefore, investing in multi-family properties tends to be more accessible – if done through real estate syndication – than buying a standard house or condo.

The only downside to multi-family investing

Of course, there are downsides to multi-family investments, as with any investment choice. The biggest drawback is the lack of control. When you invest as a limited partner, you get a prospectus and a significant amount of financial detail up front. However, since the general partner has the final say in day-to-day operations, you have no control over day-to-day operations, renovations to be made, etc.

If you want to have complete control over your investment and be able to choose the exact property you want, choosing a single family home will give you that. You will be able to decide what renovations you will do and when you will do them. You will be able to choose when to sell or when to keep the property. And, you can even set how much rent you’re willing to take (or even choose to rent as Airbnb if that works better).

It’s a bit like owning your own business rather than investing in a publicly traded company. You are in control when you have a business, but you have a lot more headwinds against you. When you invest in a large, publicly traded company, you don’t have as much control, but the CEOs likely have a lot more expertise to successfully navigate the business.

Although all investments carry the risk of loss, multifamily, on average, are better. With a single-family home, all your proverbial eggs are in one basket. If that fails, you could lose a lot. Multi-family investments are not without their problems, but they do not have the same volatility in terms of income.

Both are excellent investments, however. No matter what you choose, you should know that real estate has always been one of the best ways to build wealth. Whichever vehicle is right for you, start investing today for a better tomorrow.

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