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

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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 so that’s why I invest in both, but for different reasons.

Here are some Pros and Cons:

Single Family Residences or SFRs

Pros

More Affordable

It’s usually 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, 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

If you want to diversify, you can buy SFRs in different parts of the country, with different market characteristics. See how I bought one property (over 2000 miles away from my call room.

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 & 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

So there are pros and cons to both which is why I like having both of them in my portfolio of investments.

I’ve known real estate professionals who invest heavily in one or the other. Those raising money tend to lean towards 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 by 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?

5 COMMENTS

  1. Great breakdown! So far I’ve on done a condo and a townhome. Mostly for experience and they have been relatively easy to get into. Hopefully at some point, I’ll be able to diversify into a multi-family or a stand alone single-family home.

  2. Personally I like single family homes. You get a better tenant and fewer headaches. But you do have more leverage with apartments. Nothing wrong with apartments as long as you can deal with the management aspect.

    • Most people base this decision on return on investment and scale, but those other factors (better tenants, less turnover, easier management) are definitely important to consider as well. That’s why I like owning a mix.

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