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Good news! They are both great investments. As long as the numbers on a property work, and as long as you are educated in terms of your buying criteria and the risk level you are taking on, both single-family homes and multi-family homes are great to add to your rental property portfolio.
But if you are only trying to buy one property right now, which one should you go for? If you are buying your very first rental property, which one should you start out with?
How about an easy breakdown of the pros and cons of each to help you decide? But first, let me clarify some terms.
There are a few terms you need to understand when thinking about single-family homes and multi-family homes and differentiating between them for investment purposes.
First, know the acronyms that you will see used for both.
Single-Family: Typically you will see the acronyms SFR (single-family residence) or SFH (single-family home). Either one is fine. I will use SFR in this article for no reason in particular; I just like it better.
Multi-Family: Following the same pattern, you will typically see either MFR (multi-family residence) or MFH (multi-family house) for these. To follow suit with my choice of SFR, I will also use MFR for this article.
Now that I can type a lot faster because I can use acronyms instead of full words, let me explain another differentiation.
Residential: Residential properties refer to places in which people live.
Commercial: Commercial properties are ones that cater to businesses or organizations.
Unfortunately, these two terms start intertwining pretty quickly, so here comes yet another distinction.
Residential SFR: Residential property with only one unit. Meaning — like your typical house, rather than a duplex, triplex, etc. One unit means technically one set of people living there (set can mean a single person, a family, roommates, etc.)
Residential MFR: Residential property with either 2 units, 3 units, or 4 units. So that would be 2, 3, or 4 separate units, meaning 2, 3, or 4 sets of people living there.
Commercial MFR: This is a residential property containing more than 4 units. See where it’s a little confusing now? It’s still residential units, but it falls under the commercial umbrella. Commercial buildings, as stated above, more often deal with office or business spaces, but in this case it is still referring to residential properties. I guess because the assumption is that anyone buying this size of property plans to run it like a business? I have no idea. Either way, apartments for example fall into this category.
The primary time the residential vs. commercial terms come into play is when you are talking about financing. Residential loans are very different from commercial loans, so that can play a major factor in deciding which route to go.
Related: Why I Invest in Single Family Homes Over MultiFamily
Work backwards with me a little now, starting from scratch. You want to buy a rental property and you have to decide what kind to buy. Assuming you are buying a residential property (tenants renting a living space and not an office space), you can decide between an SFR and an MFR. But if you want to go the MFR route, then you have to decide if you want a “residential MFR” or a “commercial MFR,” meaning a building with 1-4 units or a building with more than 4 units. Commercial properties operate differently in terms of financing and other factors, so for this article I’m going to stick with residential MFRs only. However, the pros and cons of MFRs do pertain a lot to commercial MFRs as well, so you can use that in your considerations.
Pros and Cons of SFRs and MFRs
As with just about anything in real estate, or in life, there are pros and cons to both sides. I want to again preface this pros and cons list by saying that these things only matter assuming the property itself is a good deal — the numbers suggest positive cash flow, it fits educated buying criteria, and proper teams and experience are in place to manage the property.
If all of those things are intact, and now you have the choice between a SFR and an MFR, this list can come into play to help you decide which one to buy. Or use it to determine if you want an SFR or an MFR first, and then determine where the other factors (cash flow, etc.) fit.
Here we go! Pink stars refer to “pro.”
The cost per unit will always be cheaper with an MFR. The overall cost of the whole property might be more than an SFR, but the cost per unit is lower. So you are getting more bang for your buck in terms of how many “doors” (the cool person’s lingo referring to units) you get.
This one only matters if you are taking out mortgages on your rental property. Banks limit the number of mortgages you can have — typically at 10 if you have really good qualifications, but oftentimes less than 10. If you are only buying SFRs, this will max you out at 10 properties.
But what if you buy 10 4-unit MFRs? Then you end up with 40 units! Huge difference there, and again dependent on your financing ability, but no one can contest that you can buy more “doors” using mortgages if you buy only MFRs.
Because of the shared walls, the shared yard, and whatever else the …read more