Investing in Single Family vs. Multi Family Houses

December 22, 2020 · 8 minute read

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Investing in Single Family vs. Multi Family Houses

Buying property is a common way to invest outside the stock market. Owning a rental can offer key benefits to homebuyers, including a potential stream of passive income and the possibility for real estate to grow in value.

When debating whether to invest in the home buying process, the difference between a single family or multi family houses can matter.

Each home type comes with pros and cons, which investors may want to chew on before opting for a specific real estate investment.

Here’s a look at the major differences between single family and multi family investment properties:

What is a Single Family Home?

Single family homes are stand-alone structures with their own lot. They don’t share common space with another unit.

Generally, they’re meant to house one tenant or a family. In the real estate world, single family homes differ from attached properties, like condominiums or townhouses.

Investors considering purchasing a single-family home could start the process in much the same way as when buying a primary residence, enlisting the help of a real estate broker or home loan lender.

Below are some factors investors may want to think through when looking into single family properties:

Affordability of Buying

When an investor is deciding how much house to afford, single family homes are typically priced lower than multi-unit constructions.

Because they’re designed with one family or individual in mind, single family homes are generally smaller in size—and, less square footage (and floors) can mean lower listed prices on the property.

Other costs, such as utilities, don’t necessarily add to the price of investing in a single family house. Rental agreements typically require tenants to pay all or nearly all of the utilities costs for a home.

In a multi family unit, the landlord may have to shoulder more costs, such as the cost of electricity used in common spaces.

Recommended: Home Affordability Calculator

Fewer Tenants Can Mean Less Conflict

In multi family units, landlords may be called in to resolve all sorts of conflicts between tenants. For example, landlords may have to mediate tensions if a neighbor is noisy or has a loud pet.

A single person or family living in a single-family unit shrinks the chance for conflict between tenants. (In rare cases, landlords may deal with conflicts between single family tenants and neighbors in nearby buildings.)

Additionally, tenants who live in a stand-alone home may be more likely to treat the buildings as their own, taking better care of the house and lot.

They may closely monitor the condition of the whole home, letting landlords know when there are maintenance issues to take care of.

Reduced Maintenance Costs

Speaking of maintenance, single family units typically require less upkeep than multi family buildings.

In a multi unit property, things can get complicated. Landlords may be dealing with different sets of appliances or diverse tenant schedules, for example.

If something goes wrong in one unit, it may affect other units at the same time. For instance, in a multi family building, plumbing or wiring may need to be replaced in multiple units at the same time.

Multi family units are larger, so problems that feel more manageable in a single family home can become a bigger deal when scaled up.

Investors may want to compare the different costs (and logistics) of exterminating termites in a small home vs. a bigger multi-unit building (where numerous tenants may need to be relocated temporarily), to name one possibility.

Property Value Appreciation

Single family homes tend to be in higher demand than multi family residences, which could mean the property is more likely to gain in value. Single family homes are priced largely based on supply and demand.

The more people want them, the higher home appreciation may go up. (Naturally, demand is just one factor among many that can impact a home’s valuation).

Multi family buildings, on the other hand, are priced in part on the condition of the buildings. One extra factor in calculating the value of a multi-family building is the potential rent revenue that this sort of property can bring in. If rents go up in the area, the value of the building can rise accordingly. (The opposite is also true).

Cash Liquidity

There may come a time when a landlord wants to sell. Landlords might no longer want to deal with tenants, or they may need to access the equity wrapped up in their rental property.

Because of the high demand, sales for single family homes tend to be faster, providing investors with potentially easier access to their invested cash.

What is a Multi Family Home?

Multi family homes are buildings that have more than one unit and can house more than one family, such as apartment buildings. They could also be a duplex or a triplex.

Below is a list of factors investors might want to think on, when deciding whether pursue purchasing a multi-unit building:

Recommended: A Guide to Buying a Duplex

More Rental Income

A multi family building can be more expensive upfront to buy than a single family home. However, each unit in the building might produce rental income for the owner.

When combined, these rents can total more than the single revenue from a stand-alone house. Opening up multiple streams of income is one of the main reasons investors opt for multi-family properties.

Fewer Vacancy Issues

When a single family home is vacant, the owner’s rental income stream dries up completely. Owning a multiple family building can mitigate this risk of lost income when a tenant leaves or breaks the lease. If one unit is vacant, even for an extended period, other units might still bring in regular rental income.

Economies of Scale

In some ways, property management costs can be simpler for multifamily homes, especially when it comes to economies of scale. For example, say a landlord needs to replace the roof on a 10-unit building. The cost of replacement may be lower, per unit, than if a landlord needs to replace the roof on just one single family home.

Recommended: Guide to Buying, Selling, and Updating Your Home

Diverse Investment Options

Multi family buildings can offer more property options to investors, too. Wouldbe landlords might invest in anything from small duplexes to large apartment buildings with dozens of units.

There are also more options for investing in multi-family buildings. Individuals purchase the property by themselves, or they can go in on an investment with a partner.

Investors can take a more passive role in multi family investments as well. Real estate syndication allows a group of investors to pool their resources to buy more expensive buildings than they could afford on their own.

Investments like these used to be the purview of the very wealthy. Since the passage of the JOBS Act in 2012, real estate crowdfunding increasingly has become a more popular option. Buildings funded in this way are generally managed by a professional management company and profits are passed along to investors.

Multi-family investors might want to pursue shares of a Real Estate Investment Trust (REIT). REITs invest in multi family properties. They trade much like regular stocks, which makes them easy to buy and sell (offering investors more liquidity).

Investors in REITs have no contact with the day-to-day operations of the underlying investment properties. REITs could be a better fit for long-term investors, who aren’t aiming to buy and then resell quickly.

Financing a Real Estate Investment

Financing an investment property is a little bit different than financing a first or second home, whether it’s a single family home or a multi family building. As with the buying of a first house, investors may want to check credit scores and review their financial assets before applying for a mortgage loan.

Wouldbe buyers can also examine their debt-to-income ratio, which shows lenders how much debt borrowers have acquired compared to their income. (Lenders review this as one among many factors when evaluating mortgage applications.)

It’s likely that prospective buyers of investment properties may need to put down at least 20% of the property’s listed value—but, it’s not uncommon for lenders to ask for a down payment of 25% to 35%.

Single family homes can be financed with a conventional mortgage. However, because investment properties pose more risk to loan lenders, interest rates are typically higher than they would be for primary or secondary residences.

Loans for single family houses, duplexes, triplexes or fourplexes, collectively known as “one-to-fours,” don’t differ very much. In other words, investors looking to buy a building up to four units can do so with a conventional loan.

Loans for apartment buildings with more units, however, may be a bit more complicated. Lenders may consider factors, such as:

•   Debt service coverage (cash flow relative to debt)
•   Net income generated by the property (revenue minus expenses)
•   Loan-to-value ratio (the loan amount compared to the value of the property).

There are different, federally-backed apartment building loans that certain investors may want to consider, including:

•   Fannie Mae Apartment Loans offer loans of as little as $750,000, with 20% down. Fannie Mae offers conventional loans and specialty loans, such as green financing or senior housing.
•   Freddie Mac Apartment Loans offer loans, beginning at $1 million, including conventional loans, small balance loans, targeted affordable housing loans, and senior housing loans.
•   Bank Balance Sheet Loans are loans that banks keep in-house. Both traditional and online banks may offer these loans, which they do not repackage and sell to government-sponsored enterprises, such as Fannie Mae or Freddie Mac. The loans remain on the banks’ balance sheet. These loans don’t require owners to live in the same community as the building they’re buying.
•   FHA apartment loans, aka HUD 223(f) loans, start at $2 million. They’re insured by the US Department of Housing and Urban Development (HUD), and they are available for the purchase of buildings with 5 or more units.

The Takeaway on Comparing Mortgage Options

Purchasing a rental property, whether a single family home or a multi unit building, could be one way to diversify an investment portfolio. A mortgage loan from a private lender may help investors to purchase a stand-alone rental home or multi family building.

Mortgage loans with SoFi, for instance, offers a quick and easy application process and affordable down payment options.

Curious about buying an investment property? Learn more about applying for a home mortgage loan with SoFi.

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External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.


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