In this Millionacres debate, Laura Agadoni and Matt Frankel, CFP, lay out the pros and cons of single-family and multifamily investing.
A "better" investment strategy depends on how you define "better." If you look at only numbers, you might conclude that multifamily investing brings in more money (unless you buy a lot of single-family homes). There's no right or wrong investment regarding single-family or multifamily, though. It all depends on the deal and what you can handle.
Why I like single-family investing
Laura Agadoni: I consider a better investment something I understand. When I first started investing in real estate, I bought in neighborhoods similar to the kind I grew up in: a 3:2 home in the suburbs. I know a lot about these types of homes and the people who might be interested in the product because I lived it.
Most people start investing in real estate by buying a primary residence. If, for example, that residence is a home in the suburbs, it's not too much of a stretch to get a second home nearby. You already know the neighborhood and how to market it to potential tenants.
It's advantageous in several ways to live near your rental property: You can easily get to the property to renovate and then show it. And then, when you get a tenant in, you can quickly get to the property to make repairs or to let the repairperson in if your tenants aren't there.
It's usually best to learn all aspects of a business before expanding. By doing all the work yourself, at least at first, when you buy more properties, you can consider hiring a property manager. And since you know what needs to be done to properly manage your properties, you can better manage the property manager.
A good investment can mean lots of things. If you're looking for cash flow, a single-family home can provide that. If you're looking for a good return on your investment, a single family home can provide that as well. And if you're looking for a good exit plan, single-family homes are usually easy to sell, generally easier than multifamily properties are.
Plus, single-family homes require less capital to acquire. And that's a huge pro. Many people start with single-family investing and then switch to multifamily, but that's not always the case. Some never leave single-family investing. Multifamily does have the potential to bring in more rental income since you'll likely have more units, but that also means more vacancies to contend with, and if you don't know the business or the market, you might not fare as well.
Keep in mind that COVID-19 has skewed the scales a bit to single-family investing. People left or are leaving urban apartments for more wide-open spaces in suburbs and rural areas, particularly if they can work from home.
You might think of single-family as the tortoise and multifamily as the hare. And remember that slow and steady wins the race.
Multifamily rentals can be more stable
Matt Frankel, CFP: I'm a rental property investor with both single-family and multifamily properties in my portfolio, and if I could do it all over again, I'd probably place more emphasis on multifamily. Multifamily rental properties tend to avoid major value swings, produce better cash flow, and offer an element of diversification to your rental income.
Let's take these one at a time. While there are some owner-occupied multifamily properties, most are bought specifically for investment purposes. For this reason, their prices tend to depend more on the rental income they generate as opposed to the overall condition of the housing market. In other words, if you're buying a single-family home, you'll have to compete with other investors and homebuyers who intend to live in the house. This leads to a higher level of price stability. Because of this, multifamily homes tend to sell for lower multiples of their rental income than single-family, which means it's generally easier to find cash-flowing multifamily rental properties.
Finally, multifamily homes have naturally diverse rental revenue streams, which can be an especially appealing characteristic for new investors. Think of it this way -- if you buy a triplex and one unit sits vacant, you'll still be collecting two-thirds of your rental income. If your single-family home sits vacant, you get nothing. For this reason, multifamily properties can be a great way for investors to start to build a portfolio, without too much risk of negative cash flow.
Pros and cons for both
As we've seen, both single-family and multifamily rental properties have their own pros and cons, and there's no perfect answer for all investors. The right option for you depends on your risk tolerance, long-term goals, and cash-flow requirements, as well as the conditions of your desired real estate market. And it's entirely possible that the right way for you to build a portfolio of rental properties is with both types.