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Single-Family vs. Multi-Family Real Estate Investing

Posted by Walnut Street Finance Team on Nov 13, 2018

Multi-family property investing can be very lucrative. But it is also very different than single-family property investing. Single-family investment tends to be designed for a quick turnaround — get in, fix up, and get out — where as multi-family is a much longer-term investment. There are a variety of different factors to consider, different numbers to crunch and different research to be done...

What’s the Main Difference between Single and Multi-Family Investing?

single-family-homeapartment-complex

With a single-family investment, the idea is to turn a quick profit. You locate a property with good potential that is priced low, you make the necessary renovations, and you sell it for a solid profit. It’s a relatively quick and simple process.

Multi-family investments are made on properties you intend to keep. Here, the idea is to locate a property that is in relatively good shape and has a low vacancy rate. You may need to make some cosmetic changes or renovations to make it desirable, but once it’s ready, you work to make sure the units are always rented. Basically, it can generate income month after month, rather than in one fell swoop.

What Are the Costs to Consider?

When you purchase a single-family property as an investment, there’s only a few numbers you really need to think about. Mainly, cost of the property, cost of renovations, and amount you can sell it for.

There’s a lot more to keep in mind when it comes to multi-family properties.

Before you make a multi-family purchase, you’ll want to know approximately how much a specific property can allow you to earn. This is done by adding up the expected income (mostly rent, but also storage fees and parking fees) and subtracting the expenses you’ll most likely incur (such as repairs and maintenance) from that estimated income. This simple equation will give you your monthly Net Operating Income, or NOI. If the expenses aren’t clear, you can use what is known as the 50% Rule — simply take your expected income and halve it to get an estimated NOI.

The monthly NOI is a great number to keep in mind, but it’s really just the start of your number crunching. It tells you what you’ll make if you own the building outright. However, since most investors rely on mortgages to purchase their properties, that expense needs to be calculated too. You’ll want to subtract your monthly mortgage payment from your monthly NOI to understand what your true monthly cash flow will be.

The last number of major importance is your capitalization rate, usually just referred to as the cap rate. This number lets you know how quickly you can get a return on your investment. The cap rate for an investment as dependable as a CD is going to be very low (think 1–2 percent), but when it comes to multi-family properties, you’ll be aiming for something in the 5–10 percent range. To determine you cap rate, take your monthly NOI, multiply it by 12, then divide that number by your total mortgage amount.

Multi-Family Properties Have a High Scalability

Apartment building in Philadelphia, Pennsylvania.

When you purchase a single-family investment property, there’s limited scalability. It’s a great investment idea if you want to grow your business and wealth at a measured pace, since there’s generally a limit to how many homes you can successfully flip at a time. Multi-family properties are vastly different in this respect — they come with a lot of scalability.

If you’re buying a single multi-family property, you’re also just buying one thing, but that one thing comes with multiple housing units, each capable of increasing your income. However many units are inside the multi-family property, that’s the number of different properties you’ve actually acquired. So if you purchase a single building with 50 units, it’s really like you’ve just purchased 50 individual properties. That kind of scale is unique to multi-family investments.


What if You Rent Single-Family Properties Instead of Selling Them?

If you chose to rent single-family properties, then yes, you are making a monthly income on each. However, that is still just one unit. And if you had to evict your tenant, or they moved, you could find yourself with no tenants for a while —meaning no one is paying the mortgage on your investment for you. Multi-family properties inherently have less risk, as you can build a vacancy rate into your estimates.

Plus, a multi-family investment property simply generates a much larger cash flow — more units means more income. And they also come with greater control over their value. Simply put, the more income a property receives, the higher its value. A fully rented 20-unit property is going to generate more income than a single-family property; therefore, that 20-unit property’s value will increase more quickly than the single-family property.

Are You Ready to Make the Plunge?

So do you think you’re ready to start investing in multi-family properties? They’re a completely different beast than single-family properties, but they’re not without some very tangible benefits. Make sure you look at all the numbers and do your homework. And when you’re ready, don’t go too big too fast. Grant Cardone recommends starting around 16 units to keep things manageable while creating the right amount of return on your investment.
Walnut Street Finance Team

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