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Is It Better to Invest in Single Family Rentals or Apartment Buildings?



One question I get asked a lot is, “Is it better to invest in single family rentals or multi-family properties?”

The truth is that there’s no perfect answer and so that's why you should invest in both, but for different reasons.

Here are some Pros and Cons:

Single Family Residences or (SFRs)

Pros

  • More affordable

  • Usually it’s easier to purchase a single family vs an apartment building because less capital is needed initially.

  • Good for slow steady growth

  • You could possibly buy one a year and in 10-15 years, have an amazing cash-flowing portfolio.

  • Liquid in pieces

  • If needed, you could sell off a single home for the cash and not lose your entire portfolio.

  • Easier to diversify

  • If you want to diversify, you can buy SFRs in different parts of the country, with different market characteristics.

Cons

  • Slower ability to scale

  • With multi-family properties you can buy a good number of units under one roof at once. With SFRs, it’s one house at a time.

  • Liquidity in full

  • It’s harder to sell all your assets quickly if needed. You’d have to either sell one by one, or as a portfolio which is harder to unload.

  • Market-dependent values

  • Value is tied to real estate market in general and is led by comparables vs. what the property is generating in income.

Multi-family Properties (Apartment Buildings, Two Units and Above)

Pros

  • Easier to scale

  • You can buy multiple units under one roof in one transaction.

  • Economies of scale

  • If the roof needs fixing, you only need to fix one roof. You only need one insurance policy, and so on...

  • Easier financing

  • A building that has five or more units is eligible for a commercial loan. These loans are much easier to obtain than residential loans because they’re based more on the investment (the building) than all of your own personal assets and liabilities.

  • Easier to manage

  • You can usually hire a manager and maintenance crew to take care of the units as it is more cost effective depending on the number of units.

  • More control over value

  • Value is usually tied to the performance of the building and revenue generated through rental income. Therefore, intelligent and savvy repositioning of buildings can result in large gains quickly.

Cons

  • More expensive

  • More units typically results in a higher price point. May be harder to purchase one on your own.

  • More management intensive

  • Typically there are more issues in dealing with tenants. They are typically more transitional in apartments (equals higher turnover) and there’s always the issue of inter-tenant squabbling.

Conclusion

So there are pros and cons to both which is why an investor should have both in their portfolio of investments.

Again, the answer isn't clear cut, but what I do know is that you can accomplish these goals with investing in either one or both. At the end of the day, I’m also looking for multiple streams of passive income and investing in both SFRs and Multi-family properties is a good way of diversifying within the real estate sector