If you’re new to real estate investing, one of the early questions you’re likely to ask yourself is whether you should purchase a singe-family or multifamily home to rent out. As is the case with any investment, there are pros and cons of single-family and multifamily rental properties. There’s no right answer as to which one is best; instead, consider the positives and negatives of each to determine which one is right for your wants and needs.
When we talk about a single-family home, it refers to a home with only one unit and one lease. A multifamily rental home has two to four units and two to four leases, as with duplexes, triplexes, quadplexes (AKA fourplexes), and small apartment buildings with up to four units.
Here’s a quick look at some of the main pros and cons of single-family and multifamily rental properties to help you figure out which one would make the most sense for your starter real estate investment.
Pros of Single-Family Homes as Residential Rental Properties
- They’re typically more affordable than multifamily properties and apartment buildings, requiring less capital and a smaller down payment.
- Ownership can be helpful at tax time—especially if you eventually own multiple single-family homes—as residential rental properties are the most tax-advantaged asset in the US tax code.
- You’ll have more options to choose from, as single-family homes account for about 2/3 of residential properties in the US.
- They’re significantly easier to sell if you decide down the road that you have a compelling reason to sell your rental home. This property type can of course be sold to people looking for their own home as well as to any type of real estate investor.
- There’s lower management needs and tenant turnover to deal with.
Cons of Single-Family Homes as Residential Rental Properties
- There’s less cash flow from only one lease, and it’s all riding on one tenant’s ability to pay.
- Vacancy between tenants means no income.
- Maintenance needs can be more pressing. For example, if the sole washing machine breaks, it must be repaired or replaced immediately; however, if a multifamily home has a laundry room with more than one washing machine, the matter isn’t as urgent.
- If you decide to use a property management company, it’s often less cost-effective than with multi-unit properties.
- With your eggs all in one basket, so to speak, it can become a significant drain on your overall investment portfolio if the home is underperforming.
Pros of Multifamily Homes as Residential Rental Properties
- All of your revenue isn’t dependent on one tenant and one unit being occupied.
- Property management services are usually more cost-effective.
- You can more easily experiment with different approaches to being a landlord. For example, you have more flexibility to try offering long-term and short-term leases.
- They build a larger, more dynamic real estate portfolio.
- You can live there if you want to save money while still generating income.
Cons of Multifamily Homes as Residential Rental Properties
- They often mean more frequent tenant turnover to deal with.
- There’s more management work involved, such as with showings, tenant screenings, maintenance, etc.
- It’s harder to get financing for a multifamily home than for a single-family home. You may also need to show the lender a more thorough business plan.
- These types of homes are considerably harder to sell than single-family homes. Buyers are limited to real estate investors, with the exclusion of buyers looking for their own home.
