We often get asked “Which is a better investment – a Multi-Family Rental (MFR) or a Single Family Rental (SFR)?” In today’s video, we discuss some of the differences between investing in a Multi-Family and Single Family, and considerations regarding both types. Questions you should ask should include: What is your investment plan? What are your goals for your investment property? Are you planning to manage the investment property yourself, or are you hiring a management company?
Transcription Results:
Hello, and greeting from Colorado Springs. My name's Lance Kohler and I'm the broker/owner of the Cornerstone Real Estate Team. Today I'd like to talk about a question we get asked often which is, which is a better investment: single family rental property or a multifamily rental property? There are big fans and proponents on both sides of that question.
We work with investors that are focused on adding multifamily properties to their portfolio, and we also work with investors that are focused on adding single family rentals to their portfolio. And really, I think whether one's better for you or the other it comes down to what your goals are. What's your investment plan? Are your goals to own a hundred units at some point, or is your goal solely focused on cashflow and the amount of cashflow you can get out of the property? Does your investment plan include self-management? Do you plan to manage it yourself or do you plan to hire a professional property manager?
What I'd like to talk about today are some points to consider, some things to take into consideration if you're trying to determine whether you want to purchase a single family home as a rental property or a multifamily property as a rental investment. Now, we manage over 400 units in Colorado Springs and among those, about two thirds are multifamily rentals. So one third is single family rentals. So we have some experience on both sides of the coin.
The first consideration for you is scale. Like I said, this kind of ties back to your investment plan or your goals. Is your goal to add one rental property a year for the next 10 years, then a single family home as an investment property, may be of interest to you. If your goal is to own 150 rental units in the next 10 years, you probably want to look at a multifamily investment.
The second piece is management. So management for a single family home versus a multifamily property are quite a bit different. So a single family home if you live nearby, you could potentially manage that fairly easily yourself. A single family home typically has one tenant, one family or one group of tenants living in the property. And so you have one person or one individual to deal with. You may have some maintenance issues that you correspond back and forth with them. But again, it's simpler.
If you're in a multifamily property, it becomes a little bit more challenging or it could become more challenging because you have a larger number of people living in a smaller amount of space. If you own a fourplex, for example, now you have shared walls and you have shared ceilings and floors. You may have shared utilities, you may have parking issues, you may have issues with who's taking up more of the trash bins or who's taking up more of the parking spaces, for example. So you have multiple tenants, although they're under one roof, you have multiple tenants, and the potential for a conflict is there.
Most times a lot of folks have a professional property management company manage their multifamily properties and so that may free you up from the self-management or do-it-yourself management and allow you more time to focus on other investments or find your next deal.
Another difference between the single family and multifamily rental is the value and how they're sold. So if you own a single family home and it's an investment property for you, and you've got to put it on the market, you may sell it to another investor. But the value of that property is going to be dependent on the comparables in your area, in your city, in your town for a similar size home.
The value for a multifamily property, it's typically derived solely on the income that it produces. That's how it's going to be sold. It's less determined by comparable units in the neighbourhood, more determined on the income that it produces. Now, in that case, in a multifamily property, you have more potential to increase the value of your property. If you bought a property and you were able to increase the income and reduce the expenses, you've just increased the value of your property by increasing the return on investment or the net operating income. And you can do that in a single family home, but it's not going to drive the value of that single family home up because again, that home is going to be looked at not only by investors, but typically the larger part of the market would be potential homeowners who are comparing that home to the rest of the market in the other comparable properties in your area.
Another point to consider is vacancy. So if you own a single family home rental and it's vacant, you're at a hundred percent vacancy. If you own a fourplex, for example, a multifamily property and one of those units is vacant, you still have 75% of the units providing you income. Another thought in reference to vacancy is if you take a four year period on your single family home and you two year leases, you've only turned over that property once. So one, really, potential for vacancy. In that multifamily property, tenants in a multifamily property are typically more transitional. So you may turn over each of those four units in that four year period, some of them more than once. Something else to consider.
Another topic is cost. So right now it requires less capital - it's cheaper - to get into a single family home than it is to buy a multifamily property, an apartment building. So you may want to consider that; which is a better use of your capital. In inventory, so across the United States there are something like 5 million available, single family homes for sale. And that's probably fairly consistent depending on the time of year. Less inventory for an apartment complex or a multifamily property. So that's something else you may want to consider.
I hope this information was of value to you. We post educational articles for do-it-yourself landlords, independent rental owners and investors on our social media accounts on a regular basis. So if you like this, please like and follow us on our Facebook, Instagram, and Twitter pages.
Here at Cornerstone Real Estate team, we are veterans continuing to serve. We have six former active duty soldiers, former retirees on our staff with over 125 years of combined service to our country. Let us know how we can serve you. Thanks. Have a great day.