When I first became a landlord, I assumed that multi-unit properties would generally be the best investments. I imagined myself exclusively owning triplexes and quad-plexes.
But as the years have gone on, I’ve grown to love single-family residences (SFR’s), as well.
In this article, I’m going to compare multi-units and SFR’s. I like both of these types of properties, both of which have benefits that are quite different from one another.
(As a note: In this article, I’m discussing small residential multi-units of 2-4 units. I don’t have any experience with larger, commercial multiplexes … at least, not yet.) :)
Advantages of a Multi-Unit
#1: More Building, Less Land
In a rental-property situation, the underlying land is a non-performing asset. What does that mean? You make money on the building (specifically, on rent from the tenants occupying the building), not on the underlying land. Yes, that parcel of land may rise in value, but your strategy is based around monthly cash flow, not long-term capital appreciation.
Multi-units allow you to consolidate multiple rental units on the same parcel of land, thereby allowing you to maximize your performing asset (the building units) while minimizing the “overhead,” so to speak, of the underlying land that you’re required to purchase.
#2: Consolidated Overhead
A multi-unit building has only one roof, one set of gutters, one basement or crawl space, one yard that needs termite bait stations and pest control. This represents consolidated overhead. Rather than pay to replace four unique roofs on four SFR’s, you can replace one roof on a 4-plex.
#3: Easier Property Management
Why drive to four properties when you can drive to just one? Property management can be easier in a multi-unit, since a trip to one building can allow you to visit many more tenants.
#4: Create a Rising Price
The “value” of the house will largely be a reflection of your gross and net rental revenue. That means that even in a stagnant economy, where home prices aren’t moving, you can “force” your property to rise in value simply by stepping up your game and becoming a better manager. If you can cut operating expenses and/or raise the rent, you’ve just caused the value of the property to rise – regardless of what’s happening in the overall economy.
Advantages to a Single-Family
That all said, SFR’s possess some distinct advantages, as well.
#1: Less Maintenance
Depending on the customs and norms in your neighborhood, many tenants who live in SFR’s are responsible for taking care of their own yard. They rake their own leaves, mow their own lawn, and pay for a ticket from the county if they’re cited for having grass that’s too long.
In a multi-unit, however, the landlord is usually assumed to be the responsible party. Yard care is more likely to be your responsibility, rather than the tenant’s job.
#2: Lower Utility Costs
In some cases, landlords for multi-unit properties are expected to pay for certain utility costs like water or trash, particularly if the units aren’t individually metered. In SFR’s, however, tenants often shoulder the entire cost of utilities, including water and trash.
This is a case-by-case point. It depends on the laws, customs and norms of the specific area that you invest in. It also depends on how your multi-units are metered.
My point is more general: if you’re comparing two investments, one of which is a multiplex and one of which is an SFR, you may be more likely to have to pay for some utilities in a multiplex.
#3: Easier Parking Situation
SFR’s generally have straightforward parking situations. Many have garages or carports, and most have driveways.
Multiplexes, on the other hand, have more varied and complex parking situations. Some have parking lots, which the landlord is responsible for maintaining. Others have only street parking, which is less attractive to tenants.
#4: Higher Rent and Lower Vacancy
Depending on the preferences and tastes of the tenants in your area, you might be able to command higher rent and enjoy a lower vacancy rate on your SFR’s. Some tenants prefer having their own house, rather than sharing a multiunit with other renters.
Of course, this depends on your area – no one in lower Manhattan is looking for an SFR. But if you’re buying property in an area where SFR’s neighbor multi-plexes, you might find that tenants prefer SFR’s, all else being equal.
I know, I know – as a buy-and-hold investor, you don’t imagine yourself selling the home. But if you do decide to sell, your SFR can be marketed to both owner-occupants as well as investors. Your multiplexes, on the other hand, will compete for a smaller buyer pool exclusively comprised of investors.
So which is better? I don’t think there’s any “right” answer. I like them both. When I first began investing, I thought I’d adhere exclusively to small multi-unit properties (2-4 units). But I’ve developed a love for SFR’s over the years, as well.