Is It Better to Invest in Single Family Rentals or Apartment Buildings?

JULY 06, 2017
Passive Income MD


One question I get asked a lot is, “Is it better as a doctor to invest in single-family rentals or multi-family properties?”

The truth is that there’s no perfect answer, and that's why I invest in both, but for different reasons.

Here are some pros and cons:

Single Family Residences (SFRs)

Pros

  • More affordable.
    • Usually it’s easier to purchase a single family vs. an apartment building because less capital is needed initially.
  • Good for slow, steady growth.
    • You could possibly buy one a year and in 10-15 years and have an amazing cash-flowing portfolio.
  • Liquid in pieces.
    • If needed, you could sell off a single home for the cash and not lose your entire portfolio.
  • Easier to diversify.

Cons

  • Slower ability to scale.
    • With multi-family properties you can buy a good number of units under one roof at once. With SFRs, it’s one house at a time.
  • Liquidity in full.
    • It’s harder to sell all your assets quickly if needed. You’d have to either sell one by one, or as a portfolio which is harder to unload.
  • Market-dependent values.
    • Value is tied to real estate market in general and is led by comparables vs. what the property is generating in income.
 

Multi-family Properties (Apartment Buildings, Two Units and Above)

Pros

  • Easier to scale.
    • You can buy multiple units under one roof in one transaction.
  • Economies of scale.
    • If the roof needs fixing, you only need to fix one roof. You only need one insurance policy, and so on.
  • Easier financing.
    • A building that has five or more units is eligible for a commercial loan. These loans are much easier to obtain than residential loans because they’re based more on the investment (the building) than all of your own personal assets and liabilities.
  • More control over value.
    • Value is usually tied to the performance of the building and revenue generated through rental income. Therefore, intelligent and savvy repositioning of buildings can result in large gains quickly.

Cons

  • More expensive.
    • More units typically result in a higher price point. May be harder to purchase one on your own.
  • More management intensive.
    • Typically there are more issues in dealing with tenants. They are typically more transitional in apartments (equals higher turnover) and there’s always the issue of inter-tenant squabbling.

Conclusion

There are pros and cons to both, which is why I like having both in my portfolio.

I've known real estate professionals who invest heavily in one or the other. Those raising money tend to lean toward multi-family properties for their ability to scale.

However, physicians usually have a different goal -- they want to simply find consistent sources of passive income to supplement or replace their current income without taking up too much time.

Again, the answer isn't clear cut, but what I do know is that you can accomplish these goals with investing in either one or both. At the end of the day, I’m also looking for multiple streams of passive income and investing in both SFRs and Multi-family properties is my way of diversifying within the real estate sector.

Anyone have a strong opinion one way or another?

For more by Passive Income M.D., check out his blog.


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