There are several obvious reasons an investor might choose a multifamily investment over a single family investment when purchasing Residential Investment Property.
Most investors want cash flow. The price to rent ratio on multi unit buildings are much better in comparison to the single occupant property. Basically, higher gross income is achieved for a lower cost of product.
Another reason is vacancy risk. The property with more units has less risk of being 100% vacant, than if the single tenant vacates. In that scenario, the vacancy is always 100%.
If those were the only 2 things that mattered, why would anyone want to purchase a single dwelling for a rental property?
The fact of the matter is, there are plenty of other factors to consider with comparing the 2 opportunities.
Before I spell out the details, I want to give you my conclusion first. Overall, each investment has its unique features and benefits, and I suggest not choosing one over the other. Rather, a perfect portfolio of real estate would include both.
Location. The end-all, be-all of real estate. If the majority of people don't like where it is, then you will always be renting or reselling to the minority. Have fun. Both SFR and MFR are located in good and bad locations alike, however, the MFR that is located in the better locations, are more rare, likely more expensive, and defeat the purpose of cash flow, if the price to rent ratio is similar to a Single Family.
Cost. The overall cost of a MFR is higher than SFR in almost every category. Price. Down Payment. Interest Rate. Turn-over & Maintenance. All things need to be considered, when figuring your apples-to-apples return on your investment.
Tenant Quality. Typically the average multifamily unit rental rates run at or below the average rent for the market. And a single family home rents usually much higher than the average rent for the area. Therefore, your tenant is typically above the average income and more stable. And you can expect higher turnover and effectively more maintenance and repairs in the Multi Units.
Exit Strategy. Whether or not the investment earns a net income throughout your ownership, both will need to be sold for a gain, which amplifies the percentage of your return on the capital you have invested. But each investment is sold to a different party. The multifamily resale market is dominated by the investor. You will sell your product to another investor like yourself, who is interested in one thing. Making Money. So, if you ran your investment into the ground, it will reap what you've sown. However, a single family home, is resold to the emotional owner occupant. Now your investment can have vision for a family. The new buyer does not care what its previous rental income was. Only can they fit their couch under the window, and/or walk their kids to school. Your window of opportunity to sell is much broader in the single family resale arena. In most real estate cycles, the investors run 20% of the number of sales. Leaving the vast majority of buyers for the single family dwelling.
To recap what I said earlier: I do not favor one over the other. CASH FLOW is important in every investment. And in almost every case, the MFR does cash flow significantly higher than the SFR. But I think both are extremely important to hold in one's portfolio. To be heavily weighted in just one category is actually a mistake.
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