Multifamily vs. Single-Family Investing: Which Is Better for Beginners?

0:00Should you buy a multifamily or a single family rental property? It's an age-old debate in real estate, and it's also one of the first decisions you'll need to make before building your own real estate portfolio. And one of these properties tends to be more affordable and is arguably easier to manage. The other is more scalable and may even give you more cash flow. But which one is the better long-term investment and which one will actually help you reach financial freedom faster? Today, we're putting them head-to-head. We'll break down the biggest differences between the two, weigh the pros and cons, and put a couple of real properties under the microscope.

0:35We'll even let you know which one we would buy if we are starting over today.

0:45Okay, Tony, single family versus multifamily. What was your first, actually? Was it a single family or was it a duplex? My first was a single family. I've actually never owned traditional multifamily property. Every investment that I purchased has been a single family. And then we got our got a mortel. So I've I've never done like small multifamily before. And Ashley, we all know yours is like a$17 duplex somewhere that you bought. $17 ,000, Tony, not$17. OK. All right. All right. I was close. I was close. Yeah, my first was a duplex. So the difference between a single family and multifamily is first single family, one household typically.

1:30Sometimes a single family can be considered like it may have an ADU or something like that, but it's zoned as a single family. So sometimes it could be considered a single family, but technically have two units in it depending on how it's permitted and things like that. And then small multifamily or multifamily property is when there are multiple units so that multiple families, how it has its name, can occupy the property. So you're looking at a duplex, which is two units, a triplex, three, a quadplex, four. And then after that, it just goes to a five unit, six unit, seven unit, eight unit, all the way up.

2:10I would say one of the biggest differences between single family and multifamily is the common areas and just like the fact that you're having multiple families or individuals of separate households living together on the property. And then the second thing is actually like the market value and how the value of these two properties compare in different markets. Let's talk about that a little bit and maybe let's just break down the pros and cons of both sides. I think both serve a purpose in different ways. Maybe we can talk about single family homes first. I think the biggest pro to a single family home is the simplicity and abundance of deals.

3:04simplicity in the sense that almost every single market across the country has a single family home for sale. Not every single market has small multifamily for sale at any point in time. Like in my neighborhood where I live in Southern California, there just isn't a lot of multifamily. Like it just doesn't happen. There aren't a lot of duplexes or triplexes. Like most of my neighborhood is like very suburban sprawl where it's all single family homes. So like we just don't have a lot of inventory. So for me, I can open up Zillow on any day and find a deal to go underwrite if it's a traditional single family property.

3:38And then just again, simplicity wise, I think rookie investors can just wrap their heads around the idea of one house, one family inside, one door as like a stepping stone for their first deals. And like, as I mentioned, the fact of looking at the market value of each of those properties in different markets, that plays a big role into it as to like single families are easier to sell because you have a larger buyer pool. So like in my market that I invest in, a single family home has shown more appreciation over the years than a duplex has. Like very similar property, but if it's broken into two units compared to single family home, the single family home has had more appreciation over the years than the duplex in my market.

4:32Which is, let's talk about that just for a little bit too, Ash, right? Because in small multifamily, maybe not as much, but definitely when you get into like larger multifamily, the value of the property is a little less based on comparable sales and more so based on like the net operating income. But for the smaller multifamily properties, are you saying that they're also using that approach of NOI, net operating income, to appraise a property? Or are they actually doing just the comparable sales approach where they're looking for other duplexes, triplexes, and fourplexes in the area? It can depend on the loan product.

5:08So if you're buying it as an investor and you're getting a commercial loan, they may look at that. But in all of mine that I've purchased, they've never, ever looked at that for a duplex. I have a six unit property and a five unit property. And they did look at that for those when they did the appraisal. But as far as like getting appraised to find the value of a property, it's has is the same as the single family home for the duplex. They're just using other duplexes as comparison for when they're doing the appraisal. Yeah. So I guess that that maybe sometimes is another benefit to the traditional single family home is that even just like the appraisal part is going to be a little bit easier because there just tends to be a lot more inventory of single family homes they can appraise against.

5:53And cheaper. Sometimes they charge more because it's two units. That's true, right? Even the appraisal itself is a little bit cheaper. Have you been in a situation though, Ash, where they just couldn't find another small multifamily to really appraise against yours? And because of that, you feel like your appraisal was impacted negatively? No, I wouldn't say that for the small multifamily. I would say more for my short-term rental actually like you know it's a two single family homes on one parcel um that's where i i had trouble but not for duplexes but if you are in a market where there's not a lot of small multifamily then yeah they'll probably have to stretch out farther and look at a a bigger area and then you could get yourself into trouble because you could know that like where your property is the neighborhood is really good but like if you're going out a couple more miles you know that area is not as nice, but since it's in close proximity, they could still use that as a comp because when they're putting comps, they're not looking at, you know, where, where the crime is and things like that.

6:56They're just using like a radius around that house that you're purchasing or appraising as to which ones to use for comps. And like, I think a lot of us know, Tony, that, you know, when you're looking at a city and if you don't know this, you're going to learn it today. It's like you're looking at a city that you could literally turn a corner and it can now be an area where nobody wants to live and nobody wants to be in. It's in high crime. But around the other side of the street, it's like the best neighborhood that you want to be in. So it can just change so quickly and rapidly street to street.

7:28And I think that's another benefit, too, though, of the single family home is because there are so many different neighborhoods and there are so many different options. selling the property in the back end can be a lot easier as well. Because a lot of times when you're selling a single family, you could be selling to another investor, but a lot of times you might just be selling to someone who wants to move in there for themselves, right? So your pool of potential buyers just tends to be a lot bigger on the back end exit as well. One more pro that I really want to highlight too is the management of the single family.

8:01Because when you're putting together their lease agreements, since they're the only person living in it, you can ultimately like put in there whatever you want them to take care of. Like if you want them to be in charge of the snow removal, if you want them to do the landscaping, where if you have a small multifamily that has shared areas, like if all of your tenants are sharing the driveway, it's hard to say, okay, you guys are all responsible for making sure the snow is removed. It's just going to cause fights and cause problems because someone's not pulling their weight to, you know, shovel their little portion on the driveway or whatever.

8:31Then you also have to deal with parking. Like they're all getting along and parking well. If you only have like so many parking spots in the parking lot or they have to, you know, in a lot of cities where the driveway is so narrow, you only have can park in front and behind each other. And then it's coordinating cars to get in and out when someone has to go to work. The other one has to get up, move their car around. And I'm speaking of all these examples from experience. So I really like single family that it eliminates a lot of the issues that can come up with having multiple households living on one property and sharing common areas too.

9:07That's a great point, Ash. And I think maybe we can transition down to the pros of multifamily because it almost acts as like a counter to the pro that you just mentioned. Because while all those things you said are very, very true, I think that the benefit of multifamily is that if I have four single family homes or 10 single family homes and I've got one 10 unit multifamily building. And you can check me if I'm wrong here, but we felt this experience with our single-family Airbnbs and our motel, the 13-room motel, much, much easier to manage than 13 separate individual Airbnb properties. And for multifamily, I would assume it's the same way.

9:49Have you seen that experience yourself, that the fourplex is easier to manage than four separate individual single-family homes just because everything's under one roof? You get one handyman who kind of knows the whole building and they can tackle all those things. Are you seeing the same thing in your portfolio? That's actually a great question. And I used to manage a 40-unit apartment complex and then I have 40 rentals. I would take my 40 separate rentals over that 40-unit apartment complex. And I never, ever thought that I would think that way. I never, ever thought that. Because I always thought you have one roof, you have less overhead.

10:28Like it just makes sense mathematically that like you have this everything under there. Like you said that there's only one place the handyman needs to go. You have one building. I will say as far as managing the properties. So take the tenants out of the equation, managing the properties. It is 100 % easier to have those 40 units under one roof. You have all the information for the building. You only have to remember or write down or have the information for one building. You only have one roof to worry about. you only have one parking lot to worry about that the property management on the other side with me having 40 units i when someone there's a question about one of the houses i have to pull up that information for that house and like there's so many different you know they're in different towns that have different laws that has different rules like garbage pickup day is like you know five different days across all the properties like there's so much more information that you need to have and keep track of with having the 40 different units separated across.

11:29But here's what I'll tell you is easier. Managing these 40 separate units compared to the 40 unit building, managing the tenants, it is way worse with the 40 unit apartment building. Way worse. And I don't know if it's because everybody's living in one place, but all the disputes and disagreements of managing 40 different households, all trying to share the same hallways, the same dumpster, the same mail room, the same parking lot, like that side of it was way worse than what it is for my 40 unit apartments. 40 unit apartment every single day, there was communication of some kind. I probably have in my 40 units, probably maybe interaction with my tenants at maximum five times a month, as in that would include a maintenance request that would include just like a message asking about something or, you know, talking with them about late rent or like an issue or problem that has come up, like probably five max where at the other, the 40 unit was every single day, there was something that needed to be communicated or taken care of with a tenant specifically.

12:46Ash, do you think that, does it have anything to do with like the class of property? Like do you have like a, are your single families like in, you know, A and B class neighborhoods and your multifamily is in C class? No, they're all, they're all pretty much in the same market or very close. And like mine aren't 40 single family. They're still small multifamily. So like it's a mix of both single family and small multifamily, but just like using a bigger one, like a larger multifamily as comparison. But also too, when you're getting into that scenario of having a 40 unit, like it makes sense to hire property management or to like hire someone to run it because you have the, well, hopefully you have the, you know, the, the cashflow from that property, just support having a property manager to take care of those issues.

13:34But in my experience personally, I would rather take the 40 individual. if I had to pick the tenant management of it is what I would rather do is the individual properties than the complex altogether. Okay. Well, that's good to know. That's why we got you on here as a resident multifamily, large and small expert. Ash, you can give those insights. Oh, and one more thing on that too is that I feel like you have more financial opportunity with having the separate units than the one building. Because if you want to, if you need cash, you can go and refinance, you can get a line of credit on your apartment complex, you know, you can do all of that.

14:17But with the small multifamily, you could list one property for sale. You could put a line of credit on one of them, on two of them. You could pay off one of them. So like with the large apartment complex, you're going to pay off that property. Like you have a lot of, that's probably going to be a lot of money you need to pay off that. Where at the single family, you could have some that are completely paid off and then other ones with mortgages on it. So I kind of like that side of it too, is that with having the different units, you have flexibility and financial opportunity where you can kind of move things around if necessary.

14:56It's a great point. You have more levers to pull, which you don't get with the multifamily. I think maybe on the inverse side of that, one of the other benefits of multifamily is that there's maybe less risk in the sense that on a single family home, if someone moves out, you're at 0 % or 100 % vacancy, right? Or 0 % occupancy, if I'm using my short-term mental words. But on the other side, with multifamily, if I have a fourplex and I've got three out of the four units rented, well, at least I still got some income, even though someone's out, right? So there's a benefit in the other direction of having multiple people under the same roof.

15:39And it's more scalable for small multifamily because like you're, or even large multifamily, just multifamily in general is you're purchasing, you're doing one acquisition. So you're making one offer, you're making, you know, you're doing due diligence on one building, you're closing, you're doing one mortgage, you're, you're done. But if you say that that was a five unit you just bought, that was one process. But if you're going to buy five single family, you have to do that five times over. You have to go and find five different properties. You have to offer on them. You have to get them accepted.

16:20You have to do due diligence on those properties. You have to get through the closing. So acquisition, I think is much easier to get more under one roof than it is to like do them all separately too. In general, I feel like there's pros and cons to each, right? Both can be successful, right? But each one has its own pros and cons. I think maybe the last thing I'd highlight, Ash, on the multifamily side is that in addition to your point of just being able to scale faster, you can typically also get more cash flow. If I have one single family residence that's$300 ,000 versus same price, 300K, but I've now got five units or four units, in theory, the rent across the four would be more than the rent for that one property.

17:17So more cashflow, potentially better returns as well. Okay, so we covered the benefits and some of the cons of each of these different asset classes. But when we come back, we're gonna highlight a few more cons you should be aware of for each strategy. We'll be right back. Most deals don't fall apart because of the numbers. They fall apart because of the financing. You find a property that cash flows, the deal makes sense. But then the lender looks at your personal income, your tax returns, your debt to income ratio, and suddenly the deal doesn't qualify. That's the disconnect. Because as investors, we're not buying based on our W-2, we're buying based on the asset.

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20:55And Tony, I think one of these is house hacking completely, you know, capable of doing house hacking by renting by the room with single family. But a lot of times that may not be something that you actually want to do is rent by the room with other people living in your property and you're more comfortable having your own unit. So it does limit the amount of people who would use house hacking as a strategy if they only had the option of a single family because you do have to live with others where if you get your own unit, to me, that at least sounds a lot nicer idea of house hacking than single family.

21:34And then on the multifamily side is that as you get bigger, the financing requirements start to change as well. Now, obviously, if you go super, super big, like say you're like, syndicating an apartment complex. It's multiple seven figures and it gets really, really complex where you've got to have a guarantor on loan and someone who's got the net worth to be able to sign for it and it gets a little bit more complex. A lot of times you'll need more money down. We talk about buying a single family home, like to your point, Ash, house hacking a single family home, three and a half percent down. FHA, there are some loan options that are zero percent down.

22:14But as you get into some of the larger multifamily things, they want 20%, 25%, sometimes 30 % down in order for those deals to make sense. So I think even on the financing side, it can become a little bit more complex as you get into the multifamily space as well. There's also requirements with commercial loans and not even just for like large, you know, multifamily, but even like for my five unit, my six unit is when you're doing a commercial loan, a lot of times they will have requirements of you need to keep as long as you have the life of the loan. Like, for example, you need to have sometimes so much money in reserves and then sometimes you need to stick within a specific DSER kind of range in order to keep the loan in good faith or good, you know, it's that it's in compliance.

23:07Um, so there are other things with commercial loans when you're getting into, um, small multifamily or large multifamily that you do need to consider to like, make sure that your property is performing well. Um, so like if you do have a single family and your property sits vacant for a while and you don't have any income coming in, but you just have a, you know, conventional loan as the financing, no one's going to be checking and caring and that there's no income as long as you're going in and paying your rent. But when you have one of these commercial loans, they're going to ask you for financials every single year.

23:42And they're going to make sure that your property is performing and that it's not all of a sudden going downhill. When I worked for another investor, every year we would submit the financials. And if there was anything that was out of the ordinary, they would question. And I would have to show like, oh, we replaced the roof. um that's why you know the capital improvements was so much higher this year or um we did like a whole re-landscaping you know like different things like that or we just had a ton of repairs and i would have to show what those repairs were to the bank too so that's also something to be cautious of when considering going with a commercial loan for small multi-family too wash what do you think should we look at maybe like some some real examples uh of of what this might look like in practice.

24:29So the team at BiggerPockets here gave us two deals that are actually on the market right now. One is a single family home in Memphis, Tennessee. We'll call that Maple Tree Drive. The other is a duplex also in Memphis, and it's on Wainoka Avenue, right? So we got the Maple Tree single family home. We have the duplex on Wainoka. Why can't we just call a single family and then the multifamily. Because I just want to hear you stumble over the words. That's the whole reason why I saw that. I was like, I've got to get Ash to try and say that live on air. So we've got the single family, we've got the duplex.

25:10So the single family here is 210 ,000 bucks. And let's just assume that for both of these, we're going to do 20 % down, call it a 7 % mortgage rate, 8 % for vacancy, and 1 % of purchase price for maintenance and capex. So if we just use those as ballpark figures for both. On the single family home, 210 ,000 bucks, 20 % down, 7 % rate. Your principal and interest will be about$1 ,100. Property taxes, about$230, insurance$120, maintenance$175, vacancy$128. And based on what we're seeing, rents in this area are about$1 ,600. So guys, if we take that$1 ,600 and we subtract out all of those expenses that we just listed, we end up with a cashflow of negative$172 per month.

26:03So here's a single family home. It's brand new construction, beautifully done, but we will be losing negative 172. Now I just want to highlight too, because we're also including maintenance and vacancy, which hasn't happened. We don't know if that's going to happen, but we still want to make sure that we account for those things as well in our initial underwriting. So it's tough on a single family home, at least in this market for this specific deal. But let's look at maybe how the duplex compares to that one. So the duplex, we are going to purchase it at$269 ,900 with 20 % down, also 7 % mortgage rate.

26:42So for P &I, we're looking at about$1 ,400 a month. The property tax,$315 a month. Insurance, $160. Maintenance, about$225. Vacancy at 8 % is around$200. And we think we can get for rent about$1 ,250 per unit, so$2 ,500 in total per month. This would put us for our monthly cash flow at$164 per month. So sometimes this is easier to get a multifamily property cash flow because you have the higher combined rents, but you also have similar expenses. So for example, let's look at the property taxes. The single family home, the property tax is$231 per month, and the property tax of the duplex is 315.

27:33So even though you're getting double the rent, you're only paying a hundred dollars more in property taxes, basically a little actually less than that, um, each month. And then the insurance for the single family, 120 insurance for the duplex, 160. So a lot of those expenses are not that much more if you have more units in the, in the property, which can make a big difference. And even though the per unit rent on the duplex is cheaper than the overall rent for the single family home, because there's two, we're generally going to make more. Guys, in this example, the duplex gives you more cash, but which one of these properties actually gets you to financial freedom faster?

28:18And let's assume obviously that we're only buying single family homes to produce cash flow, right? But don't go anywhere because we'll cover that and more right after the break. I just booked a trip to the coast and I cannot stop thinking about it. Waking up early, walking somewhere I've never been, finding a little cafe with no plan except to see what the day brings. A few days to explore, try new restaurants, smell the salt and citrus in the air and remember why we left to travel in the first place. That feeling of being somewhere completely new, that's what keeps me chasing the next trip. But here's what makes it even better.