“Let’s get ready to rumble!” – Mo. Ali. “The Greatest”
I say this halfheartedly because of the pride held by both the single-family home investor and multifamily investor. I am going to tackle a highly contested topic: Is a single-family home a better investment than a multifamily property?
Unfortunately, I am not going to give you a yes or no answer. I am going highlight the reasons why I find multifamily investments to be superior for my investment goals, and you should always analyze an investment based on what you are trying to accomplish. My objective is to persuade you to join the “dark side” a.k.a. multifamily investing.
Economy of Scale
When I first began investing in multifamily properties, I focused on smaller units. I owned a few duplexes spread out across the city. Why did I choose this path? This seemed to be the path of least resistance, and in my mind, it was easy to achieve. It appeared to be a sound strategy for me at first, but I quickly realized that each duplex had to be maintained separately. Each property had to be landscaped, the snow plowed, the mechanicals for each property serviced, the roofs and driveway kept in good condition, etc. I came to realize that it would be very difficult for me to achieve an economy of scale by owning a vast array of units spread out across the city, especially as an out-of-town investor.
What I quickly realized when we purchased our first 25-unit complex was the economy of scale that was present. What does that mean? Since all of our units were in one location, the per-unit expenses were much less. For instance, there was one lawn to mow, one garbage bill, only a few roofs to maintain, and collecting rent was much easier. All the tenants were within walking distance of each other. No driving from one home to the next to evict a tenant. This economy of scale made it much easier for us to manage our investment.
Our goal was to build a business with real estate, and multifamily properties would allow us to scale up quickly and grow the portfolio. It would be much easier to hire a maintenance crew and managers to help run our business. At first, we employed a resident manager. But as our portfolio grew rapidly, we were able to hire full-time employees to provide the services to our property.
In my opinion, it is much more difficult to achieve this economy of scale if you are purchasing one single-family home at a time. It can obviously be done, but multifamily properties are the ideal vehicle if your goal is to build a sustainable and growing business because of the ability to serve more “clients” in one location, along with achieving a higher per-square-foot rent than you can achieve in a single-family residence.
Less Work to Buy
This second reason may seem rather obvious, but I think most investors do not take into account the expense and time it takes to acquire 25 single-family homes as opposed to one 25-unit complex. Even if you bundled several homes together, you are still looking at multiple closings, not to mention visiting all of these homes before you put in an offer. Wouldn’t it be nice to visit one property, negotiate with one owner, come to terms with that single owner, and perform one closing? This reason alone will allow you to focus on your company and grow the business, not to mention the time and expense you will save.
Spreading Risk Over More Units
If you own a single-family home and it goes vacant for two months, guess who will be paying the mortgage? YOU. But if you own a 6-plex and two tenants decide to vacate, you still have four rents coming in to cover the expenses. Multifamily properties allow the investor to limit their downside risk by having multiple tenants pay the expenses. Once again, the investment lends itself to the investor model, where the revenue stream will be sufficient to pay the expenses and generate cash flow at the end of the month.
Single-family homes are usually purchased based on the sales approach. That is, the “comps” in the market usually drive the value of the property. What is a 3-bedroom, 2-bath selling for? The home is compared to similar properties in the market. In contrast, multifamily properties are purchased using the income approach. Now, why is this distinction so important? You have much more control in a multifamily property to “force” the appreciation of the property by driving up the net operating income (NOI). There is no waiting for market forces to drive up the value. If you employ a sound repositioning strategy to your investment, you will be able to generate wealth in a relatively short period of time. I think this is one of the biggest and most important distinctions.
To most investors, this may not seem apparent. But as I read through the forums on most real estate websites, most of the discussions are centered on fixing and flipping and wholesaling, two strategies that focus primarily on acquiring single-family homes. This increased competition ultimately leads to margins being driven down, and profits suffer as a result. In the Northeast, there are countless investors chasing these investments.
In the multifamily space, many investors possess a limiting belief that it is difficult to buy an apartment complex, and they never enter the arena. This faulty thinking has been changing the past few years, but many investors still hesitate to explore the possibilities of jumping into multifamily properties.
My hope is to have provided enough evidence to at least have you consider the benefits of multifamily properties. If you decide to join the dark side, please leave me a comment below and let me know what persuaded you. Please include below what your preference is and why.
Do you prefer single-family or
multifamily investments? Why?