Investing in Multi Family or Single Family Residential

Hello All!

Let me begin by clarifying what type of multi family properties I am referring to.  Apartments and single family homes are not a close comparison so for the purpose of this post multi family will mean duplex, tri plex, and four plex.  Choosing between investing in multi family or single family residential can be a difficult decision for some.  Although investing in multi family housing can be rewarding it's a more intensive investment.  By this I mean you turn over tenants more frequently, there is more maintenance involved, rent fluctuates more, and your investment is heavily impacted by larger multi family developments such as apartments.

Since multi-family units resemble apartment living, many folks looking at multi family units are also looking at apartments.  This can be bad for the multi family owner because apartment complexes can be built at any time and they offer many services that are not offered in smaller multi family properties.  Pools, high speed internet, cable, club houses are all amenities that smaller multi families do not offer.  In my local market area of Colorado Springs, CO there are numerous apartment complexes currently under construction.  These developments consistent of dozens or hundreds of units that are in direct competition to your smaller multi family property.  It's very difficult for a multi family owner to compete with these huge developments and therefore rents will need to be adjusted to compensate.  This equates to lower rents per unit and therefore lower potential profit and return on investment.

Since many multi family units are 2 or 3  bedrooms many folks use them as a stepping stone to a larger unit.  This means most tenants stay for 1 to 3 years and then they need more space.  Plan on turning over tenants every 1 to 3 years when factoring in your return on investment.  Since each unit is it's own "home" you will also be responsible for four fridges, furnaces, stoves, etc.  For this reason you will need to make sure your cash reserves are available for repairs.  You will also need to factor in tenant disputes.  There is little separating each unit and noise can be heard easily.  If you have a daytime sleeper difficulties can often arise.  If you are purchasing a multi family I would suggest getting units that are arranged side by side.  This way there is only one wall or one side of the unit that is shared and will help cut down on noise complaints. 

Yard maintenance is another thing that will need to be addressed.  Since the building is shared, many times the owner is responsible for yard maintenance.  Depending on where you live this can be costly when considering sprinkler systems, mowing, tree trimming, etc.  Utilities will need to be addressed prior to purchasing a property.  Is each unit individually metered?  Is there one main meter that is split 4 ways?  Who pays for the common area lighting and heating? Will you provide trash service? Make sure you research all of this before jumping into a multi family property.

Single family homes on the other hand eliminate a lot of these issues.  The tenant is typically responsible for maintaining the yard, there is little to no common areas to deal with and utils are individually metered and the tenant pays for all utils. You only have one furnace, water heater, and appliances to deal with and tenants typically stay longer in single family homes.  Although there will still be maintenance that needs to be done and paid for by the owner many of the day to day items are handled by the tenant.  Single family homes are minimally impacted by apartment developments because many apartment dwellers are not looking for single family homes and vice versa.

In my experience single family homes are better investments.  Your rents are more stabile, you have little to no issues with shared walls, noise complaints and tenant disputes are less likely, and you have a better opportunity for appreciation.  I hear arguments frequently that with a multi family property if one tenant vacates you still have 3 properties rented.  I understand that if a tenant moves out of a single family home the entire asset is vacant but this does not make multi family properties better.  When crunching numbers on a possible purchase of a multi family property I suggest basing your return on investment on 50 or 75% occupancy.  Since tenants move frequently your property will not be at 100% occupancy all of the time.  If you can make the numbers work based on 50-75% occupancy you probably have an Ok investment.  If you are basing your return on investment on 100% occupancy you will be unpleasantly surprised.

I am a proponent of single family housing.  Based on my experience this offers the best potential for acceptable return on investment, appreciation, and less maintenance headaches.  Although the purchase price of a multi family property can be enticing make sure you look at all angles before making the decision to purchase.  I have seen rental markets change very quickly and properties that were renting for 725 a month are now renting for 595 per month.  You can see ups and downs in single family rent prices as well but from my experience they are less volatile and fluctuate less dramatically.

I hope this helps address issues concerning single family vs multi family investing.  Feel free to post questions or comment and thank you for taking the time to read this post!

Daniel Muldoon
www.muldoonassociatespm.com