I am asked quite frequently what I think about multi-family properties vs single family properties, and how they compare in terms of an investment. What specifically are the benefits of multi family investing, anyway? And how can the garden-variety real estate investor get started, or add to, their existing holdings, working multi family properties into the mix? Let’s delve into those very topics.
First, a bit of background on me. I currently own (and in many cases manage) 15 doors that are multi-units. These include a new construction Quad (or 4-Plex); a 1960’s era traditional Tri-Plex, all in one long building; a 2-unit property (separate structures), a 3-unit property (in 2 separate structures); and another 3 unit where we converted the ground floor space into a 3rd unit, turning a 2 into a 3. All of these happen to be in various areas of Florida. I also have a handful of Single Family, in Florida, Ohio and Arizona, which gives me the ability to compare single family to multi family as investments. Like most real estate investors, I started with SFRs (single family rentals) and “graduated” to multi-family later on, so I have owned the multi’s for a shorter duration, but I’ve owned my first one – the traditional Tri Plex – since 2016, so that is a good 5 years of experience.
When I use the term multi family property, I am meaning anything with 2 units or more. The main stipulation you should be aware of is that when it is 2, 3, or 4 units, it’s possible to get the same financing as an SFR. The only difference is that you often need to put down a larger down payment, usually 25% instead of 20% with SFR’s. The property can be financed with your normal, conventional financing, just like the loan you may have on your primary residence. However, if a property has 5 or more units in it, then Commercial Financing must be utilized. This requires that the property be appraised differently when determining values, and the borrower’s credit is less of a concern, with the property itself being looked at in more detail. It may take more time to get financing if you must go commercial, and usually involves different lenders, so keep that in mind when looking at any property with 5 units or more.
Here’s a list of what I see as the main benefits of multi family investing. I will look at potential disadvantages later on.
Top 7 Benefits of Multi Family Investing
#1 – Economy of Scale.
One of the biggest benefits of multi family investing is that you only need to apply for one loan, yet you have multiple units, or doors. This is good, because getting financing is a hassle; no need to sugar coat it. If you are going through that same hassle, it’s nice to have 4 units instead of 1 after it is all over with.
#2 – One Roof. One Foundation.
Continuing with the same theme, here’s another economy of scale benefit (assuming the multi unit property is in one building, which most are). With SFR’s, each one has its own roof, but with a multi-family there are multiple doors per roof! This will save you down the road when the place needs a new one.
#3 - More protection from the occasional no-income period.
#4 – Reach your “Door Goal” faster.
Most people I speak with have a goal for the number of doors they want to acquire over time, be it 3, 30, or multiples more than that. Given that we all are allowed a maximum of 10 “Conventional” type loans (which are easiest to get and usually have the best terms), once you hit Loan #10 you have to go “off the reservation” and get non-conventional financing. So, multi family helps investors reach their goal far faster while staying under 10 loans. You find a Quad, finance it, and BOOM! You’re 4 doors closer to your goal!
#5 – Potentially cheaper to manage.
If you have a 4 unit, all 4 tenants are in one place. If you self-manage, this will require far less driving around and tending to the needs of the property (and the tenants) in disparate locations, scattered about town. It’s all there, requiring less of the manager in terms of time and trips. This translates into lower costs. If you have a property manager, they MAY also charge less as a percentage of income.
#6 – House Hacking opportunity.
Say you buy a Tri-Plex, and since you will live in 1 unit you apply for an FHA loan – which requires a far lower down payment of 3.5%. In this scenario there is a lower cost of entry PLUS with the income of the other 2 rental units you may find yourself able to live with a low or maybe even zero rent cost if the incoming rents can cover your mortgage. This is a great way to super charge your real estate investments and lower your costs at the same time. This of course assumes that you live in an area where the numbers would work in such a scenario.
#7 – Overall, there’s a much better ROI and Cash Flow.
One of the biggest benefits of multi family investing in my opinion is that the return on investment, and monthly cash flow, on my multi families is far superior to the ROI on my SFRs. A 3 unit would cost more than a SFR, but not 3 times more. The rent may be slightly less than 3 SFRs, but not by much in most situations. As a result, the numbers are superior every time I have compared a multi family to an SFR.
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There are a small handful of disadvantages to multi family investing. Let’s take a look at those.
4 Disadvantages of Multi Family Investing
#1 – Higher Turnover.
With my 1960’s triplex, I have had ONE tenant leave in 5 years, so I would have said a year ago that I had not experienced higher turnover with multi’s. However, sadly, with my new construction Quad at the 12-month mark 2 of the 4 tenants gave notice, and a 3rd went on a month to month for 7 months, whilst they waited for their personal house to be built. So, excluding the month-to-month tenant, I had a 50% turnover ratio, at the 1-year mark. So, I guess it is true that in many cases, multi family tenants tend to be younger, and more nomadic, then SFR tenants. It makes sense that if you live in a quasi-apartment, you will be less attached to it and move more often, so I concur that that is the case overall. I am still not completely convinced of that, however, as my other multi’s seem pretty stable, so far.
#2 – Slimmer Pickings.
There are far less multi family properties available to buy, as compared to SFR’s, so the pickings are slimmer – of course that all depends on where you are, and what market you are looking in.
#3 – Smaller population to sell to, when it’s time to sell.
The only folks that want to buy multi family are other investors, for the most part. Bobby and Sally Sue, shopping for their first home to live in, usually aren’t interested in multi family. So, that COULD make it harder to sell as there might be less interest. However, my personal opinion is that this is offset by the fact that there are FEWER multi family properties available. I have never tried to sell one, but the demand seems very high for multi family, at least in this type of in-demand seller’s market.
#4 – May be in rougher areas of town.
This is only the case in some cities I have lived in, but sometimes multi family properties are in the more industrial, or rougher areas of town, like C minus or D areas. This is only sometimes, in some Metros, but could be a consideration. When I lived in Phoenix, Arizona that was my impression. The multis were all in areas that I might not want to invest in, like in college frat boy areas (talk about hard on the buildings) or in rough parts of town. That was a decade ago, however, things may have changed. But something to consider.
Overall, with 30+ years experience as a real estate buy and hold investor in multiple states, I am super high on, and think there are many benefits of, multi family investments. At this point, I only look at places with either an existing multi family situation, or enough land to add one in some form down the line. The economics are just so much better, that I greatly prefer multi family in almost all situations.
Having said that however, I still own and plan to keep all my SFRs. I encourage people I speak with to start with SFRs, and once they get comfortable with all that is involved, perhaps begin to look at multi family options if it seems right for them. If not, there is nothing at all wrong with Single Family Rentals. The point is, you as an investor have real estate investments at all – that is the overall goal, right?
Is now a good time to buy multi family? Yes, absolutely. I am actively looking in my area, and other areas as well. As long as the property will cash flow positively above your PITI (principal, interest, taxes, insurance), and you have confirmed that with a local property manager, then that is a good way to confirm that it is a good deal. Just make sure it appraises (which your lender will do) – if it appraises, and cash flows to a level you find acceptable, then you are in good shape.
Ultimately, I think a diversified mix of SFRs and multis in 2-3 different areas is the way to go. Not all eggs in one basket, and a mix of property types makes for a well-diversified real estate portfolio with promises of great returns and appreciation over time! Remember, the numbers are usually the worst when you first buy something, and get sweeter with time and appreciation, and a fixed rate loan! Happy investing!