Single-Family vs. Multifamily Rentals: Which Is the Best First Rental?

0:00Should your next investment be a single-family home or a multifamily property? It's a critical question. You want to scale a portfolio and progress toward financial freedom as quickly as possible, but taking on the wrong type of property could leave you overwhelmed and slow down your progress in the long run. The good news? This choice does not need to leave you paralyzed. Today we're sharing a simple framework to help you pick the right type of property for you. The answer isn't the same for everyone, but by the end of this episode, you'll know how to think through big decisions of whether single family or multifamily is right for your experience level, financial situation, or investing strategy.

0:37Plus, we'll tackle how to balance getting your rents close to fair market value without forcing unnecessary tenant turnovers, whether new investors should take on burrs or flips, and so much more.

0:53What's up, friends? I'm Henry Washington here, the co-host of the BiggerPockets podcast, and I am here along with Dave Meyer. Dave, you're looking a little bundled. Are you wondering why I'm dressed like Macklemore right now? Is there something going on at the thrift shop we need to know about?

1:12Henry Washington:My heat went out two days ago over the weekend on Saturday morning. I woke up at my house, 40 degrees, and they actually just left my house and fixed the furnace, but it's still freezing in here. It's like literally 42 degrees. but the show's got to go on, man. So I'm just here dressed in full winter gear. Well, today we're giving people what they want. We're answering questions. You, the audience asked us on the BiggerPockets forums. So let's jump into it. The first question is from an investor named Christopher. And he said, I'm a new investor based in California, looking to start my portfolio out of state.

1:44My target is the$80 ,000 to$125 ,000 range in landlord-friendly markets with steady job growth. I'm most interested in burr and buy and hold rentals and I'm deciding between starting with a single family or a small multifamily. He goes on to say, here's where I'm stuck. Single family seems easier to manage, less intimidating, but the cashflow might be a little less. Whereas multifamilies could bring stronger cashflow and efficiencies of scale, but I've heard they can be tougher to finance and tenant issues could hit harder if I don't have a solid team yet. So which one should you start with? And what do you think the best path is for someone investing out of state for the first time?

2:21Henry Washington:All right, Christopher, good question. And I think a great approach. If you're based in California, super expensive, you want buy and hold or BRRRS, they're hard to find in California. So an out of state is a great option for you. I'm going to start with actually the second question, because basically what you said is, which is better, small multifamily or single family? All things being equal, I don't know how you feel about this, Henry, but I personally think small multifamily is just the best asset class. And I don't actually think it's really all that different from a management perspective.

2:54Henry Washington:Still got one roof, you got one tax bill, you do have multiple tenants. But I think what you'll learn, as almost every investor does over the course of their career, is it's really not that hard. Once you place tenants, it's just reacting and trying to do some repairs proactively. But I personally just think small multifamilies are better. I would challenge you, Christopher, on your question saying that you think that they're harder to finance small multifamilies and that tenant issues could hit harder. I think they're very similar to finance. Even if you are out of state, not owner occupying, you can get very similar types of loans for small multifamily.

3:31Henry Washington:Anything four units or fewer is considered a residential mortgage. And so you're still going to have pretty favorable financing. Some you can put five or 10 percent down. So you still have that option. And the thing that I would challenge about, yeah, if all of your tenants decide to up and leave at once, that will be an issue. Or if they all complain at once, that could be an issue. But I actually think that having a small multifamily mitigates risk because if you have a vacancy in one unit, it's not all of your income for that entire property. When you buy a single family home, if you can't find a tenant for two months, you're losing one-sixth of your entire revenue for the whole year.

4:10Henry Washington:Whereas if you have two months of vacancy in one of four units, maybe you're only losing 1.5 % of your revenue for the whole year. So I actually think it helps you mitigate risk, which I really like. that's just on principle. But I will say buying a multifamily for 80 to 125 is probably not realistic in a decent market. I think if you're looking for a place with job growth, you're going to be really hard pressed to find a duplex. I invest in the Midwest, you know, maybe in Detroit, you could probably find a duplex for that range. But if I were you with that price point, I actually would focus on buying the best asset I could and not on whether it's single family home or multifamily.

4:51Henry Washington:The advice I gave earlier was all things being equal. If you could afford both, I'd say small multifamily, but it sounds like you might want to focus on single family because you'll be able to get a high quality asset. That's not going to be a pain in your butt. Very well said. When you were sitting there explaining why you liked multifamily as an answer to this question, I started thinking through like, what are my favorite properties? And some of my favorite properties are single families. But when I ask the question differently and say, what are my most profitable and or wealth building properties, I get the most cash flow and I've built the most equity in my small multifamilies.

5:33And it's not even close. Really? Yeah. Yeah. And so I think you're right. Small multifamily in terms of financial benefit, cash flow and wealth building seem to be the best asset. But my favorite properties are some of my single families. And that's the end one. Who cares about what your favorite is, right?

5:49Henry Washington:But why? Why are they your favorite then? Just because you're proud of what you did to them and the renovations? Proud of what I did to them. The locations that some of them are in, just prime locations, just excellent properties. You get the warm and fuzzies with the single families. You flip a house, it turns out great. A family moves in, they're happy with it. That's nice. That's a good experience. Multifamily, Well, you don't really get that as much. I agree with that. But I just think if you're trying to build that long-term portfolio, it's great. But I just think as a first-time investor, the name of the game is don't lose.

6:24Henry Washington:You don't need to win by a lot. You don't need to hit a home run. The game is to hit a single. And my fear is that if you take my original advice and say, oh, I'm going to buy a three-unit or four-unit at 125, there's going to be something wrong with that. Your tenants are going to be sitting there like me with their hat and jacket on because their heat doesn't work or their toilets don't work or something like that. This is what you get when you buy assets that are not up to their highest and best use. So I would make it easy on yourself as an out-of-state investor and buy something that's in good shape.

6:58Henry Washington:That would be my number one criteria. The caveat here is, Christopher, I would focus some of your time on learning more ways to finance deals. There are so many tools in the tool belt in terms of financing properties, small multifamilies. I think you can get a small multifamily financed pretty easily, no sweat. And given the concerns that you've outlined here, I would say my answer to you would be definitely focus on small multifamily if you're going to up that 80 to 125K range. But if not, then I think Dave is right. Buying a quality single family asset will save you so much headache over going and buying a trash multifamily.

7:36Henry Washington:Great question, Christopher. Thank you and good luck to you. We have a new question asking about inherited tenants from Nick in upstate New York. But before we answer that, we got to take a quick break. We'll be right back. Running your real estate business doesn't have to feel like juggling five different tools. With Resimply, you can pull motivated seller lists, skip trace them instantly for free, and reach out with calls or texts all from one streamlined platform. The real magic? AI agents that answer inbound calls, follow up with prospects, and even grade your conversations so you know where you stand.

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12:03Henry Washington:Welcome back to the BiggerPockets podcast. Henry and I are here answering your questions. By the way, if you want your question to answer, go to BiggerPockets forums, ask those questions. We pick them there or you can always send Henry or I a message and we pick a lot of questions from there as well. Our next one, though, comes from Nick in upstate New York, who says, I'm a 19 year old real estate investor. Impressive. Getting this done at 19 years old. I just closed on my first duplex last week and I'm house hacking. The tenant I'm inheriting has been here for 12 years and is on a month to month lease.

12:34Henry Washington:She pays six hundred and thirty five dollars a month and comps show that the market rent is about twelve hundred. Wow. She has been a fantastic tenant for the previous owners. Rent is always on time. She's quiet and takes care of her unit well. I have no problem with her paying slightly under market rent in hopes of retaining a great tenant, but I know it is irresponsible as a business owner to sell myself short. My other hesitation is that the previous owners are very good, quote, family friends. They started renting to her 12 years ago for$6.05 and just last summer increased it to$6.35. How would you handle a rent increase?

13:07Henry, what do you think? I love this question, first of all. And second of all, 19 years old, investing in real estate on the forums asking these questions? Man, what a head start you have. I wish I was as smart as you were when I was 19. Unfortunately, I was not. I don't think I could have typed in a sentence when I was 19. So kudos to you, Nick. I have had this situation a few times, maybe not as nuanced as this, where it's family, friends, and it's in a house hack, but I have inherited tenants paying very low rents and I've had to work with them to figure out how to get the rents where they need to be.

13:40And so first and foremost is you need to realize that you're a human being dealing with human beings. And it sounds like based on the way you phrase this question, you're already in that mindset, right? And so what I have learned managing my own properties as a landlord and trying to do it in a way that both balances being human and being a business owner, most people will work with you if you give them the opportunity to, right? And so I've always tried to approach these situations where I'm just open and honest with people. transparent and I let them know. And so if this was a situation I was dealing with, I would go to the tenant and I would try to work out a situation where I could get them to stair step their rent up to where you want them to be.

14:23And realizing that, yes, I think you're also in the right mindset of saying, hey, I'm willing to take a little less than market rents because she's a great tenant. That is the absolute right mindset. Because the first thing I tell people who ask me this question is, is the tenant a good tenant? Because if they're not a good tenant, right, you need to focus on getting them out of there anyway. Completely different process. But if they're a good tenant, they take care of the place, they pay on time, they don't bother you. That's perfect. That's ideal. The second key is getting them involved in the decision-making process.

14:52So typically what I do is I pull comps for market rents and I sit down with them and I say, hey, look, these are the comps that I have. This is what's available for rent close by, similar amenities, right? And I let them see for themselves, like, if you were to move and get something equal, this is the price point that it would be at. I understand that if you can't pay that amount yet, but I do need to get you somewhere closer to market rents. What would you feel comfortable paying as a rent for you to stay here and want to stay here? And a lot of the times they'll tell me, look, I can't do 12, but I could probably get to a thousand.

15:31Okay, cool. Let's stand then. And then you have to decide, can I work with that number? And if the answer is yes, then you figure out, well, do I raise the rent next month or do you stair step, right? You'll be able to tell through the course of the conversation and what they're saying and how they're saying it, if things are reasonable, because if you go to them and you, and they say, look, I can't pay anything over 635 period. I'm done. That's it. That's all I can do. Well, then you can't. It's not reasonable. You can't reason with that person. And you have to figure out, OK, what are my next steps now that I know they won't pay anything else?

16:00But when you're showing them the comps and you're trying to work with them and you're involving them in the decision making process, I found that that typically always works well. And so then you can determine based on what they say, do I need to stair step? Because you can do things where you say, OK, if we agree on a thousand, how soon do you think you could get to a thousand? I ask them that if they say, hey, I could probably get there over the course of the next six months, if that works for me, then we just work on stair-stepping that every month until we get there. Their rent goes up a little bit until they're at that thousand.

16:30Maybe they say a year. If you can work with that, then you stair-step them a year. You get to determine what works for you and your tenant, but involving them in the decision-making process and being transparent with them because they understand if you bought a property, you have a new mortgage, you've got things to pay. People know these things. But where I think landlords fail is they dictate things to their tenants versus including them in the decision-making process. And so if you treat them like human beings, try to include them. And I'm not saying because you include them, you have to do what they ask.

16:59What I am saying is it makes an easier way for you to transition to something meaningful if you include them.

17:06Henry Washington:I completely agree. I think that's the absolute right approach. When I was self-managing, I used to just give this speech to everyone who was one of my tenants. I would just be like, I want our entire basis of our relationship just to be reasonable. Just talk to me like you would ask a friend or a family member for a situation, and I'll do what I can. And I'm going to ask you to be reasonable about things, to let contractors in, to be reasonable. And that has worked for me 100 % of the time. I've really never had an issue with that approach. I love what you said about involving them in the decision.

17:40Henry Washington:People just generally, it's just human psychology. They want agency. They want control. And even though you're not giving up actual control, giving people a say is really powerful and meaningful and will matter for your relationship going forward. If you've listened to any of the episodes with Dion McNeely, he like sort of patented the binder strategy. Have you heard that? What he calls the binder strategy? Yeah. It's the same idea, but he basically shows his tenants what rents are in the area. Like he pulls comps and prints them out and shows them to them. I think in a situation like this, you can even, if you wanted to, show what rent was 12 years ago and how rents have changed over the last 12 years recently.

18:21Henry Washington:If you want to, you don't have to beat people over the head with data, but if you can show how much taxes have gone up over the 12 years. There are real reasons why rent goes up. There has been enormous inflation across this country in the last 12 years, and not changing rents is not a tenable option for real estate investors. Now, you don't have to maximize and squeeze every drop out of the tenant. I highly recommend against doing that. I don't think that's the human thing to do, nor do I think it's good business. And I think that what Henry suggested is absolutely the right way to do it. I think the numbers you gave, Henry, are a perfect example.

18:57Henry Washington:Would you personally take 1 ,000 over 1 ,200? Absolutely, for the right tenant. 100%. If they move out and you have two months of vacancy, that's pretty much a wash, right? So wouldn't you rather keep a great tenant for a wash? Like it's a no-brainer. People get obsessed with their absolute, like people really, I think in general, get obsessed about their rent numbers when every experienced investors know it's your net cashflow that matters. Like the gross rent number doesn't matter. If you have vacancy, it's going to eat away at that and that crushes your deal. Every month of vacancy, just keep this in mind, that's 8 % of revenue you lose.

19:35Henry Washington:You lose two months, that's 16 % of your revenue. That's enough to take almost any deal from cash flowing to negative. So just keep that stuff in mind. This is why we harp so hard about underwriting conservatively. I think what happens when people get in this situation is they underwrote buying that deal, assuming they're gonna get the highest best rent number possible. And that's how the numbers worked. And then you get into a situation like this and you realize I'm not gonna get that. or if I do, it's going to take me a year before I can get there and I'm going to lose a lot of money in between then.

20:08So if you underwrite conservatively, where you underwrite based on a lower rent number, the mid tier of the rent price range, maybe even the low end of the rent range, and then you buy a deal that pencils, you have room to be able to take care of people like this.

20:22Henry Washington:This is playing out for me all the time right now. I don't know about you, but I'm not getting top market rents these days when I have renewals. I'm usually able to keep rent, but there have been a couple of units where I've had to lower rent, especially in Denver. If you guys follow the news, Denver is not doing great on rent growth, which is fine because I underwrote them this way. I have great property managers. I have great agents. They say, hey, you're going to get 1 ,500, 1 ,600 bucks. When I underwrite it, I say 1 ,350. I'm like 10 % below what they tell me because I want that flexibility.

20:56Henry Washington:I don't want to be strapped. I love being in a position where the property manager comes to me and like, actually, I can only get$1 ,450. I'm like, great. I underwrote a$1 ,350. This is excellent. I'm not worried about that. But when you set yourself up to only succeed if things go perfect, that is just a recipe for failure all the time. So to Nick, I think you know what to do. Hopefully, this is a good answer. And let us know what happens because I actually, I bet if you follow Henry's advice, you're going to find a mutually beneficial situation, which is what Henry and I are always talking about.