Learn How To Start Investing In Real Estate
Learn How To Start Investing In Real Estate

Real Estate Exit Strategies: Single Family Vs Multi family Investing

Written by Paul Esajian

There is one question related to real estate investing that has persisted for decades: which is a better exit strategy, single family vs multi family properties? While they are both unique in their own right, each can provide a great ROI if approached correctly.

Single family properties offer more opportunity based on the quantity while multi family properties can offer higher returns. It really comes down to the type of investment you want to make. Like anything else you do in real estate, you need to mind your due diligence on the specific opportunity to see if it is right for you. At some point it is no longer a question of single family vs multi family, but rather which particular strategy makes more sense for you at the time. Remember, the best exit strategy is the one you are ready for; single family vs multi family shouldn’t make a difference if you are equipped to handle both.

The most popular investment strategy for a majority of investors, particularly new ones, is single family properties. In the current market, where the lending landscape is still difficult, there are many more opportunities for single family properties than on those of the multi family nature; hence the polarizing single family vs multi family argument. Some people are largely in favor of single family investing. Instead of putting down 25-30% for a three family house, you can get into a single family unit for 10-15%. The purchase price for a single family house is also much lower on average than one with multiple units. With many of the steep purchase discounts given to those houses that need work, it is essential to preserve capital.

Another reason that single family properties are such a popular investment is that you can acquire multiple houses over a long period of time. There are investors that have bought just one single family house over a ten year period and have a built quite a portfolio. Instead of putting all of their eggs in a three or four unit house, they can spread out the risk through many different houses. It is also much easier to find a single tenant every nine months than it is to find four tenants. This keeps the property occupied and cash flowing at all times. Essentially, it makes for a much easier investment.

It is important to note, however, that there are two sides to every coin. The single family vs multi family argument is no closer to being resolved after what I just told you.  Let’s take a closer look a the details behind the single family vs multi family argument, and perhaps you will be able to come to your own conclusion.

Single Family VS Multi Family Properties

Single-family vs multifamily

For every investor that focuses on single family properties, there are others that exclusively entertain multi family properties. Instead of closing ten individual single family transactions, they can get to their ten units in as little as just one deal. Even if they close two four-family properties, they can scale more quickly. This comes at a higher cost per property, but there is something to be said in closing only a few deals a year rather than trying to close multiple deals to get to the same point. It is also easier to manage two physical locations rather than scrambling around managing ten. If you can get the same number of rent checks coming in, but only have to focus on a handful of properties, it is more appealing. Is it starting to make sense why the single family vs multi family argument is still continuing to this day? It’s clear they both offer significant advantages to the investors who choose to take them on.

Having multiple units also increases your chances at collecting rent every month. If you have one single family property and the tenant stops paying, you have no other source of income for that property. On multi-unit properties, you have multiple tenants that will theoretically pay you rent every month. One tenant that stops paying on a ten unit property will not send you into delinquency. It is less expensive to own a multi-unit property than most people think. Even though you have additional units, you still only have one roof, one yard, one driveway and one basement.

There is also much greater upside potential on a commercial property than with any single family one. When you decide to sell a single family house, you are largely at the mercy of the market and the comparable sales around you. If the area is depressed, you can have the nicest home on the block but your comparables will dictate a lower sales price. With commercial properties, you can offset a shift in the market by using market rents as a way to calculate value. If rents are strong, they will be the most important factor that buyers look at.

There is one specific variable that leans in favor of multi family units in the single family vs multi family discussion: value. You can see higher values on a multi-unit building than on most single family properties. A single family property can offer a greater return, but if you buy a commercial building or a multi unit property they can appreciate much quicker than any single unit. While you can build a nice portfolio with single families, you can build real wealth if you focus on properties with more units. The obvious drawback with this strategy is that it will cost money to make money. The cost of these properties is much higher than the average single family. You also need strong credit scores and much higher down payment to get started.

Instead of focusing on the number of units, evaluate the opportunity itself. Just like investing in the stock market, it is best to diversify your portfolio. This often means a mix of current flip deals, coupled with long term single family holds and a few commercial properties. This will give you a mix of each, and a safety net in the event that something happens with one of your properties. In the meantime, there are many single family properties readily available that can jumpstart your investing. You can slowly work yourself up to a commercial property, but know that unless you have deep pockets this will take time.

Deciding among single family vs multi family properties is largely about personal preference and goals. They both may work for some investors and not work for others. Either way, there is opportunity to make money in whatever investment you decide.