First off, I have personal experience in both of these types of investments. We are talking about buying and renting a Single Family home vs. buying an apartment building. I will talk about my personal experience with owning and managing both of these types of investments and how they differ.
Let’s begin with the Single Family, buy and hold method. I acquired my first piece of real estate shortly after graduating college with the plan of buy, hold, lease. After closing, I began to lease the property to college students who were looking to live off campus. The reason for the purchase of the single family home was simple, I didn’t have a lot of money for a large down-payment so my asset classes were limited (condos/single family homes). Also with this house being relatively close to a large university, I felt there would be a solid demand for tenants. Here were my findings throughout my five years owning this single family:
Single family Pros:
- Easy to buy.
- Generally, single family homes are some of the most abundant and most commonly traded assets throughout the market. This makes for relative ease of purchase and availability. Purchasing a single family generally does not require a great deal of money down especially when working with a local and knowledgeable lender (highly recommended). This is what first attracted me when purchasing my first investment.
- Renting the “American Dream”
- The classic slogan “The American Dream” that has been pounded into our culture for years and year by banks, lenders, and society in general. The idea of renting a Single Family is attractive to potential tenants as it provides all of the benefits of “The American Dream”. Tenants enjoy the privacy that a single family offers, especially important to families. This leads to lower tenant to tenant related issues which can be a large part of management.
Single Family Cons:
- Only One Unit
- This cannot be stressed enough. Above all else, the number of units reigns supreme in real estate investing. When it comes to Single Family homes, it is pretty easy to understand that this is only one unit, only one door. Tenant moves out, you are now at 100% vacancy. This proves to be quite risky, especially in economic downturns as single family homes are some of the first assets to become vacant as the economy shifts.
- High Maintenance Costs
- Everyone knows that any and all real estate requires maintenance, and Single Families fall under that category. Tying back into the previous point about having one unit, and the cost of maintenance to keep that one unit operating is not the greatest ROI (Return on Investment). For example, mechanicals in a Single Family solely function for this one, single unit, as where most multifamily assets have larger mechanical systems that function for multiple units. Another example is that eventually the roof will need to be replaced on a piece of real estate and it will be a substantial cost for this improvement. Keeping focus on the number of units taking precedence, you would want this capital improvement to benefit not only one unit but multiple. Also, when it comes time to sell the Single Family, you generally are not getting a large return on your investment for preforming the mandatory maintenance required to keep the home operational.
- Lower Cash Flow
- Cash flow is king, especially in real estate investing. It is not hard to understand that a greater number of units will produce higher amount of cash flow. When investing in a Single Family, you are very limited in the cash flow department, as there is only the one unit. For example, say the Single Family produces $500 a month net return, which is solid for a single unit. Now consider a 28 unit apartment building that produces only $100 a month net return, but multiplied across 28 units. Cash flow is king.
Let’s transition to Multifamily. This is the asset class we target when investing. We recently closed on a 28 unit apartment complex and have been stabilizing and cash flowing the property nicely throughout the ownership transition. We decided to purchase this property based on a number of things, including population growth, job growth, and overall demographics related to this properties location. Having this property be in a suburb of a large scale city made it an attractive investment for us to pursue. Let’s look into some of the pros and cons I have found throughout this process.
Multifamily Pros:
- Great Number of Units
- As discussed earlier, number of units when investing in a piece of real estate is hugely important. The greater the number of units, the greater potential for increased cash flow. Even at a decreased net return per door, the number of units provides a multiplier effect equaling larger amounts of cash flow. When it comes to raising the rents, either due to standard inflation, capital improvements, or tenant turnover these all tie into increasing cash flow that the property provides.
- Stability
- As is common knowledge, there are economic shifts that affect real estate. When these shifts occur, historically, multifamily assets weather the conditions better than Single Family homes. Going back to the one unit vs. multiple units conversation, when you only have one unit (Single Family) and the tenant leaves, the asset is at 100% vacancy. When you own an asset that has, for example, 28 units and a tenant leaves, you are nowhere near 100% vacancy. In fact, a 28 unit building with a tenant leaving, is at 4% vacancy. The 28 unit asset could have multiple vacancies and still cash flow through shifts in the market.
Multifamily Cons:
- More Expensive
- Historically multifamily assets have been much more expensive compared to Single Family homes. This of course means they generally require a larger down payment. The main reason for multifamily assets generally being more expensive is the idea that you are essentially purchasing a business. More importantly a business that cash flows. The more this asset (business) cash flows, the more expensive it generally is. This should not come as a shock and is one of the main driving factors in multifamily investing. Although this limits a great deal of investors due to their lack of buying power and finances to be able to purchase a larger asset.
- Higher Turnover
- With greater number of units comes greater turnover. This is generally not a negative but it is something to be aware of when investing in a multifamily asset. Compared to a Single Family, statistically speaking, the greater number of units will generate larger amount of tenant turnover. This is not to be confused with vacancy, as we discussed previously. Turnover can be a swift and streamlined process, especially in multifamily as there is generally much less maintenance required for one apartment when a tenant moves out as compared to an entire house. Something to consider when investing.
I genuinely hope this article was of some benefit to you as you explore the many was to invest in real estate. At Capital Equity Partners, we focus on multifamily assets, that cash flow and are in areas we predict to continue to appreciate and grow over time. Please visit our website at CapEquityPartners.com or email me at Tom@CapEquityPartners.com to talk in further detail on the investments we are making and the returns we are seeing for us and our investors. Hope to connect with you soon.
Thomas White
VP Investments
Capital Equity Partners
