Single Family vs Multi Family Rental Investments

When entering the real estate market, deciding between a single family rental (SFR) or a multi family rental (MFR) investment is no simple task. Like all things, there are distinct pros and cons of each, and it’s a good idea to consider all of them instead of taking a leap of faith.

The most effective way to look at the advantages and disadvantages in real estate investing is to first identify your goals, budget, and timeframe. Then, you can juxtapose how your personal criteria align with the single family vs multi family rental investment process. 

To ensure you make a confident decision, this pros and cons list will describe each path—that way, you can determine the best fit for you.

What is a SFR?

SFRs are single, standalone units on its own lot—houses, condos, or townhomes that often come with a yard, patio, and garage. They aren’t meant for multiple families or groups of people, and zoning laws typically enforce that, even if you’d like to transform your one-unit property into a multi-unit home.

Pros of Investing in Single Family Rentals

This fact alone could be seen as either a pro or con, although many people see it as a pro. After all, taking care of one unit is easier than taking care of many, no matter what the square footage is. 

Keep reading to see the full list of SFR real estate pros.

1. Less Expensive Upfront

For people who are new to the real estate investment space, picking a type of investment property that costs less money to get started is incredibly important. Multi family buildings are a more expensive business venture, so it’s less of a risk to start with a SFR property.

2. Opportunities for Resale

Single family rental investments are low risk for another reason: easy resale. SFR properties are easier to buy, which means that they’re easier to sell. Besides their lower price tag, you can sell to other real estate investors or to families looking to buy a home, making the buyer pool much larger than duplexes, triplexes, and other multi-unit buildings.

3. High (and Growing) Demand

According to data from Urban Institute, following the 2008 housing crisis, the single family home rental market became increasingly popular. In 2010, it surpassed single family homeownership and became the fastest-growing sector of the US housing market. It’s still the fastest-growing sector today and is predicted to continue its high demand for the foreseeable future—here’s why:

  • Credit card debt is at an all-time high
  • Outstanding student loan debt has reached record levels
  • The job market needs to recover from the global pandemic
  • Cost of living is increasing in most major cities

People still want their own space and to have a true home experience, rather than live in a multi family complex. But they can’t afford to buy a home themselves, leaving SFR as the best option.

4. Less Dependence on Local Economy

Local economies fluctuate regularly, so putting tons of money into a multi family rental property could be financially devastating if the local housing market takes a steep dive. Since SFR homes cost less, have a larger buyer pool, and depend on fewer tenants for rent payments, your revenue stream will take a much smaller hit, and if need be, it can be sold to someone else.

5. Low Tenant Turnover Rates

Every time a tenant moves out of a rented property, you and your property manager have a lot of work to do. This involves coordinating cleaning and repairs, stage the place to look more attractive to potential renters, list the property, screen applicants, and go through the entire move-in process.

All of those services can add up, especially if you’re doing it yourself and don’t know the most cost-effective way to tackle the tenant turnover operations. In addition, you also have to factor in the loss of income from rent payments while the unit is vacant. 

The single family rental turnover rate is roughly half that of apartment dwellers—most tenants stay for an average of three years, according to Market Watch. These are some of the reasons why:

  • Many SFR tenants have kids, and moving houses could put them in a different school district, forcing them to go somewhere else, which parents are often reluctant to do.
  • With homeownership less affordable than ever, people are renting properties and treating it like their own home, and become established in the area.
  • A positive landlord experience is less common than you would think. When people find a rental situation they enjoy, they don’t want to risk leaving, having a negative experience, and needing to move again.

What is an MFR?

As the name suggests, multi family rental (MFR) properties are buildings with more than one rentable space, designed to house multiple families or groups. All units are either contained in one building, or several structures within one complex. 

Multi family rentals, such as a duplex, triplex, or apartment complex, don’t come with an individual yard and garage per unit, but do often come with a patio or balcony, as well as shared amenities. This could be anything from laundry facilities to fitness centers, a pool and hot tub, parking garage, or communal workspaces. 

Pros of Investing in a Multi Family Rental

With SFRs making a strong case, what are the advantages of the MFR route?

1. MFR Scales Faster

If you want to grow your real estate investment portfolio as quickly as possible, you could either buy multiple single family homes or one multi family rental home. For the sake of quick expansion, multi family properties are a great way to own many units—purchasing 30 units of SFRs in an afternoon is nearly impossible, but you could easily complete that task with just one MFR.

2. Reduced Cost Per Unit

The idea of economies of scale can be explained by using the same 30 unit example. If you renovate or repair the shared outdoor amenities at your 30-unit multi family rental building, you’ve effectively updated the outdoor space of 30 properties. Outdoor renovations on all 30 units of your single family homes will cost more and take longer. 

Essentially, for many repairs, your cost per unit is lower when all units are under one roof. Here are the other ways this scaled economy works to the advantage of MFRs:

  • You need only one insurance policy, rather than 30, per the example
  • All showings, inspections, repairs take place at one location
  • You only have to hire one property manager, rather than 30—unless you work with a property management company that serves multiple locations 

3. High Cash Flow Can Mean Flexible Financing

Without owning multiple SFRs, an MFR will usually result in a higher amount of rental income. With more units, vacancy is also less of an issue. If one unit of your 30-unit investment property isn’t currently being rented, your property is 3% vacant, but if one unit of a SFR isn’t being rented, your property is 100% vacant.

It’s important to remember that greater cash flow doesn’t mean greater return on investment (ROI). ROI is defined as gains on investment minus cost of investment, divided by cost of investment, according to Investopedia.

Here’s how to calculate your potential ROI:

First, calculate your profit by taking your total return on investment (rent income), and subtracting the original cost of the investment (purchasing price), and then divide that number by the original cost (again, purchasing price).

This seems like a con, and in some ways it is, but it does open up the possibility to more flexible financing options. While SFR’s value fluctuates with the real estate market, MFR’s value is based on the income it generates, so higher cash flow means a lower risk of foreclosure, which appeals to lenders. You can also calculate single family rental cap rates or multi family rental cap rates to measure the profitability of your investment. 

Single Family Rentals vs Multi Family Rentals: Cons

It might be apparent that the SFR pros are the MFR cons, and vice versa—they’re directly related to one another. A brief overview from the cons perspective can still be helpful for the sake of clarity.

SFR: Cons

  • SFR scales slower if portfolio-building is your goal
  • With many SFRs, cost-per-unit for maintenance is more than units in the same building
  • SFR’s value is linked to the real estate market, which can be unpredictable

MFR: Cons

  • MFRs are much more expensive upfront
  • The MFR buyer pool is much smaller, making it harder to resell
  • More tenants mean more occupations to account for—if local businesses close, there’s a higher percentage you have a tenant who is affected
  • MFRs have double the tenant turnover rate of SFRs 

Navigating the Market with Great Jones

For most people, the single family rental investment risk is much lower than that of a multi family rental. Most investors in the single family home rental market only have one or two properties, but the issue of running those properties and juggling management companies is still a major concern. That’s where Great Jones can help.

With professionals in many states with up-and-coming real estate markets, Great Jones can handle all the difficult parts of running your rental property—or properties. Whether you are looking for property management in Memphis or property management in Gainesville, FL, here’s how Great Jones can assist you:

  • Photograph and list your unit
  • Thoroughly screen all applicants
  • Take care of maintenance and repairs
  • Offer 24/7 emergency support for tenants
  • Collect and deliver rent to you quickly and free of fees

Beyond regular property management duties, if you decide you want to expand your portfolio later on, Great Jones will be there to guide you. 

Sources: 

Urban Institute. Five things that might surprise you about the fastest-growing segment of the housing market. https://www.urban.org/urban-wire/five-things-might-surprise-you-about-fastest-growing-segment-housing-market

MarketWatch. The new housing play: helping priced-out renters become long-distance landlords. https://www.marketwatch.com/story/the-new-housing-play-helping-priced-out-renters-become-long-distance-landlords-2018-07-30

Investopedia. How to Calculate ROI on a Rental Property. https://www.investopedia.com/articles/investing/062215/how-calculate-roi-rental-property.asp

Kahala Bonsignore

Kahala works on the Growth Team at Great Jones where she's dedicated to helping more Property Owners learn about Great Jones and how their partnership can increase profitability and decrease rental stress.

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