While real estate investment is a sound idea, there is a difference between investing in a multi-family (MF) vs. a single-family (SFR) asset. One way to consider this is through the concept of doors. Think of a door as your single asset of revenue generation. A single-family home represents one source of revenue. Meanwhile, multi-family dwelling or apartment building may have 10 doors, representing 10 sources of revenue.
A multi-family asset offers distinct advantages over a single-family asset, but comes with a more significant financial investment. However, co-investing in a multi-family asset reduces the financial obligation as well as some of the risks associated with multi-family assets.
When the financial obligation is similar, which investment opportunity is the most beneficial to an investor’s property portfolio?
Benefits of Single-Family Rental Assets
1. Less Initial Investment
SFR assets all cost less than multi-family assets, so it’s easier to start investing in a SFR asset. You don’t need a great deal of experience or capital upfront. You can find rental homes in the Midwest and South for under $100,000, but the average small MF asset in those same areas can cost over a million dollars.
Many lenders require a typical down payment of 20%. So for a $100,000 property, an investor will need to have $20,000 as a down payment. But if you want to purchase a multi-family property, an investor will probably need to go to a commercial lender who will typically require 25 – 30% for a down payment. This means an investor would need to bring $250,000 to the table for a $1 million MF property.
This is where co-investing in a multi-family asset alleviates the financial burden of purchasing a MF asset outright.
Related: How to Become a Real Estate Investor
2. There’s Growing Demand
Single-family rental units are the fastest-growing segment of the U.S. housing market where demand has grown 30% in the past three years. Experts are predicting a steady increase in demand over the next few years. This may be occurring, in part, because millennials are starting families increasing the demand for SFR.
RENTCafe reports that SFR investment rental demand in the U.S. increased by 31% over the past decade and has outpaced demand for MF investment rentals, which only grew by 14%.
3. Greater Resale Opportunities
As earlier stated, SFR buildings are easier to buy, so it stands to reason that they are easier to sell. The buyer pool is larger with SFR buildings because you’re able to sell to traditional buyers as well as real estate investors.
4. Low Tenant Turnover
Tenant turnover is an expensive business. Whenever a tenant leaves a property, you need to clean, repair, and re-market it for new people. While inconvenient, investors can absorb a total loss of rent for one to three months every three years from a SFR vs. partial losses more frequently with MF rentals.
MarketWatch reports that the average SFR home tenant stays for three years, which is about double that of MF home renters. In fact, it isn’t uncommon for SFR renters to stay for five or six years.
5. Easier to Diversify
Just as with your investment portfolio, it’s desirable to have diversification in your rental properties. For instance, if your only SFR rental unit is in a location that’s experiencing an economic downturn, you will feel the impact of it. But if you had SFR units in various cities, a downturn in one location is unlikely to negatively impact you financially.
It’s easier to sell an SFR home and start again somewhere else than it is with an MF home having a smaller buyer pool.
Alt Text: Front view of house
Benefits of Multi-Family Units
1. Greater Cash Flow
Cash flow from owning many assets will be greater than from a single asset. Unless you own several SFR assets, an MF asset will net significantly higher rental income.
A MF asset can absorb vacancy issues more easily. If there is a vacancy in one apartment of a MF building, it represents a far smaller percentage of your overall investment where a SFR vacancy affects 100% of your rental income.
It’s unlikely that your entire MF unit will be empty at the same time, which means an investor will still have other rental income to cover the mortgage and other expenses.
2. Easier to Scale
If an investor wants to grow their property portfolio, buying 10 units together will increase the portfolio faster than one at a time. Consider buying 10 separate homes, dealing with 10 different sellers, 10 inspections, and possibly even 10 mortgages! Buying one multi-family asset means one of each of these tasks.
3. Beneficial Economies of Scale
Continuing with the example of the 10 SFR assets from above, there is more to say about the benefits of buying one multi-family asset with 10 apartments instead. It is easier to have all 10 units under one roof on your capital expenditures.
There is one roof to repair, one pool, one common area to maintain, etc. When you improve your MF asset, you’ve increased the value of all ten units. Compare this with the cost of working on 10 separate single-family rental assets.
Known as economies of scale, or reduced costs per unit, a multi-family asset only needs:
- One insurance policy
- One location for showings or inspections
- One site for all of your maintenance issues.
Property management companies charge less for managing MF rentals – usually, 4 – 7% of the monthly gross rental income compared to a much larger 10% for single-family rental units. Even contractors are likely to offer you a better deal for large scale work at one location than doing the same work on SFR homes.
4. Possibly Easier to Finance
While it can be easier to finance an SFR asset and lenders are more rigid about lending to multi-family asset investors, this is not always the case. There are opportunities to co-invest in multi-family assets with best-in-class sponsors like Trion Properties.
Co-investing reduces the risks and financial burdens associated with owning a multi-family asset. Sponsors like Trion Properties have the experience and expertise to help you to reach your property investing goals.
Are you interested in co-investing in a multi-family asset? Contact Trion Properties to learn more about their extensive property portfolio that outperforms competitors in investor returns.