When first adding real estate to their investment portfolios, most investors start by purchasing a single-family home and begin renting it out. The majority of investors who take this route do so not because it’s the best strategy or promises the biggest return but because they understand the concept. Nearly everyone has some grasp on what it takes to buy and sell a home, which makes the barrier of entry relatively low.
Multifamily properties, however, are entirely different. The idea of owning an apartment building or duplex is unfamiliar, and most investors have no idea where to start or what to do when owning such a massive property. A single-family home also means dealing with one renter, while multifamily properties require dealing with as many renters as units. This creates a far higher barrier of entry, one that many investors feel too intimidated even to try to cross.
When deciding whether to invest in single-family vs. multifamily properties, it’s often easier to take the path of least resistance and put money into an area more familiar. However, that comfortable decision could close off potential opportunities for developing sustainable passive income. Let’s look at multifamily versus single-family homes and why multifamily properties are usually the better investment.
A Single-Family Home vs. a Multifamily Home
There are several reasons why multifamily property investments offer higher potential, though both types of investments have their appeal.
Single-family homes tend to have high occupancy rates and low turnover, especially when located in desirable neighborhoods with quality schools. A lack of available homes and high interest rates have also locked many prospective homeowners out of the market, causing many to rely on renting rather than buying. Overall, single-family properties offer a low-risk investment option but one with a limited reward.
Comparatively, multifamily real estate has a few underlying advantages, making it more appealing to investors looking to create sustainable passive income.
Forced Appreciation
One significant advantage of multifamily properties over single-family homes is the potential for forced appreciation. Forced appreciation is a strategy where an investor increases the value of a property through direct improvements. In multifamily real estate, this could involve upgrading unit interiors, enhancing building amenities, and increasing occupancy rates.
These improvements boost the property’s appeal while allowing investors to charge higher rents, directly impacting the property’s net operating income (NOI). Since the value of multifamily properties is often based on NOI, strategic enhancements can significantly accelerate value growth, independent of market conditions. This control over the property’s value is a powerful tool for investors, providing a clear pathway to improve returns and build equity faster than typically possible with single-family homes.
Consistent Income
One of the primary reasons to invest in this type of property is the potential to generate passive income. However, when comparing single-family vs. multifamily properties, one offers more consistency.
As the name implies, a single-family home typically has only one renter. If that renter can’t pay their bills or decides to move out, the investor loses income but must still pay their bills. This can create stressful moments as money for insurance, mortgage, and utilities goes out while the search for a new tenant stretches on.
Having multiple tenants in multifamily properties makes it highly unlikely that an investor will simultaneously lose all of their income. With some units always being rented, investors will have some money coming in to help cover expenses. This makes multifamily real estate a potentially more stable investment overall.
Investment Consolidation
Comparably, multifamily vs. single-family investments allow investors to grow their portfolios more efficiently. Buying and maintaining 10 single-family homes would be less efficient and profitable than buying just one 10-unit apartment building. Rather than dealing with multiple mortgages, insurance policies, property managers, and individual homes, multifamily real estate enables investors to consolidate their finances into an easier-to-manage property.
Single-family homes can be volatile in maintaining their value. Neighborhoods can rise and fall in desirability, potentially impacting a home’s value and an investor’s ability to find a tenant. Multifamily units tend to offer greater stability and resilience to market fluctuations. Additionally, multifamily properties often benefit from economies of scale in maintenance and management costs, further enhancing their appeal to investors looking for efficiency and reliability in their real estate portfolios.
Vistia Capital is Here to Help Investors Make Sense of Multifamily vs. Single-Family Investments
While single-family properties offer a comfortable entry point into real estate investing, their limited growth potential and inability to generate significant passive income may make them less appealing to some investors. Concerns over maintaining occupancy and needing to buy multiple properties to expand income potential must also be considered when buying a single-family home.
Multifamily real estate allows investors the opportunity to expand their investment portfolio efficiently while enjoying the benefits of economies of scale, consistent income, and greater equity. While the barrier of entry into multifamily real estate may be higher, this type of investment also offers the potential for higher passive income and a portfolio less dependent on the market.
If you’re considering investing in multifamily real estate but don’t know where to start, the team at Vistia Capital is here to help. Our multifamily real estate experts can walk you through the ins and outs of this dynamic sector, so you feel comfortable and informed about whether this type of investment is right for you.
Schedule a consultation with our team today, and take the first step toward creating your real estate empire.