Single-family Homes vs. Small Multi-family Investing

[Hunter Beckstrom]

Hey BP!

I am still a rookie in real estate investing and am looking for some insight. For context, I am located in Minneapolis, MN and have been househacking a duplex for a year. My question is: should I continue investing in small (2-4 units) multi-family or single-family homes?

More Background:

My current goal is to be a 'small but mighty' landlord/investor (check out Coach Chad Carson if you want to learn more) in the Minnesota metro/suburb area. I am also dedicated to the 'buy and hold' strategy. I imagine the easy answer to this question could be to diversify with both investment types, however, I am looking for the pros/cons of each from y'all's point of view. I have some thoughts already. For instance, small multi-family has similar financing and offers faster scalability. On the other hand, single-family (typically) provides a tenant pool that can be more manageable and longer leases, and I am assuming maintenance and capex could be on a smaller scale, but I could be wrong on that. 

Appreciate everyone's time!

- Hunter

[Manny Vasquez]

Knowing what I know NOW, I would advise anyone that wants to be a real estate investor to purchase multi-family as much as they can. IMHO and all things being equal, this route would be the fastest way to cash flow and scale.  
I got started many years ago with a Single Family home, however, I was green and didn't know anything at all about real estate.  After my first purchase I quickly discovered that the fastest way to scale was through multi-family and so I set forth on a new path.  I did purchase some multi-family properties, however, along the way I also discovered "excellent" single-family home deals that were too good to pass up.  

Pros and Cons are:

1. Multi-Family can provide more cash flow (Pro) but it will also require more management (Con)

2. Multi-Family may require more maintenance (Con) but that cost may be offset by installing a coin-operated laundry room (Pro)

3. Generally speaking, Single family homes can be sold a lot quicker than multi-family. (Pro if you have a SFH, Con if its multi-family).

4. If someone moves out of a Single Family and your property is vacant for a month, the entire payment is on you (Con).  If you have a multi-unit and someone moves out, then you only have to come up with partial payment or maybe nothing at all if all units are cash flowing (Pro for Multi-fam)

5. Insurance will be higher for multi-fam than Single Fam.

6. If the Multi-Fam does not have individual utility-meters for all units, then you have to figure out what to do or it can potentially eat away at your cash flow.  99% of Single Family homes do not have this problem.

These are just a few pros and cons.  I hope this helps and good luck on your journey!

[Alecia Loveless]

@Hunter Beckstrom Although I prefer multi family due to scalability and economies of scale I still regularly look at and run numbers single families.

I currently own 1 SFH and 6 multis of various size the largest being 8 units.

The SFH originally cash flowed the best at about $900/month until I refinanced it to buy something else. Now it is just an average return. I like SFHs because in some of my markets they have a huge potential for upside and appreciation.

However for the most part I can get 3-4 units for the same price as a SFH which is just more cost effective.

One downside is the increased cost of insurance. I just got a premium renewal for 4 of the multis bundled together that went from $4000 last year to $9200 this year. My project in the coming weeks is to source less expensive insurance.

My 8 unit has come with a larger learning curve because it was horribly mismanaged and a total value add.

Starting out I’d recommend getting a 2-4 unit. Once you’ve got the hang of that you can easily repeat the process or go bigger.

[Bradley Buxton]

@Hunter Beckstrom

Look at the numbers and how each asset fits into your framework. If you buy a SFH is a great appreciation area you can grow equity in a year sell it and buy another SFH or a larger MF. The biggest advantage to MF is the diversification of risk if one tenant moves out. There is a reason Wall Street investors buy single-family homes. 3 single family homes in the same area is essentially the same as a tri-plex. Also consider if you're going to self manage or hire a pm. In the Reno, NV area there are some great SFH investments that are growing 10%+ in equity over the last 6 month where MF will take longer to grow in equity. Also look at demographics and what job growth prospects look like in the area regardless of the asset type.

[Sarah Meres]

Lots of great insight from the folks above.

In my experience as an investor and multifamily lender in the twin cities, I would simply say there is no "right" answer. I have seen people do this a variety of ways and you should assess it more on a case-by-case basis. My own personal househacking progression was SFH, SFH, Duplex, SFH, Duplex. Since then, I have been able to leverage equity from those to finance non-owner-occupied deals. Cash flow on each have fluctuated. I have a tenant going on his 8th year in my duplex, meanwhile one of the SFHs have turned over almost every two years.

I agree with the pros and cons above - one thing I don't see listed yet is how the property type last purchased affects your ability to buy. For example, if you start with a big single family home in the suburbs, then want to hack a 4plex in Minneapolis the following year, there will be questions regarding your true intention to occupy that 4plex as your primary. Not impossible - but a hurdle, indeed. Generally, for this reason, it's best to move from more units to less. 

I would say, keep your options open and assess the deal presents itself!

[Tim Swierczek]

@Hunter Beckstrom I know many people who have been successful with both single and multifamily investing. From my experience multifamily is easier to cash flow, and has less downside risk from a cash flow perspective. Typically you will never have more than half vacant at a time and that means you are never at zero revenue. In theory, multi-family has more maintenance, due to more HVAC, and appliances but in practice, I have not noticed a difference in maintenance. That being said, it's not true that multi-family will be as easy to buy as you age. At some point you will graduate from being willing to house hack and then a single family will be easier.  I'd recommend you house-hack some small mulitfamilies and re-evaluate every few years. I typically make significant changes to my strategy every 4 years and tweak the plan every 1-2 years in between.

[James Hamling]

Quote from @Hunter Beckstrom:

Hey BP!

I am still a rookie in real estate investing and am looking for some insight. For context, I am located in Minneapolis, MN and have been househacking a duplex for a year. My question is: should I continue investing in small (2-4 units) multi-family or single-family homes?

More Background:

My current goal is to be a 'small but mighty' landlord/investor (check out Coach Chad Carson if you want to learn more) in the Minnesota metro/suburb area. I am also dedicated to the 'buy and hold' strategy. I imagine the easy answer to this question could be to diversify with both investment types, however, I am looking for the pros/cons of each from y'all's point of view. I have some thoughts already. For instance, small multi-family has similar financing and offers faster scalability. On the other hand, single-family (typically) provides a tenant pool that can be more manageable and longer leases, and I am assuming maintenance and capex could be on a smaller scale, but I could be wrong on that. 

Appreciate everyone's time!

- Hunter

The answer is simple: 

Go where the "deals" are.... 

Shure, we can run down a rabbit hole of complexity, but why. Keep it simple, don't discriminate. Know what's viable to move onto as next and simple, review as potentials are dug up and go with what is next best. 

Keep it simple. 

The problems come when trying to force things. 

[Tim Ryan]

I would add a third option - large multifamily.  Why stop at small?  If you are thinking it's because of a finite amount of funds you have, then you are not looking at this business correctly. Unless this is just a hobby?  I'm being sarcastic, but really, think bigger.

[D. Dee]

@Alecia Loveless would you recommend buying a fixer upper or a new build/new construction?