Real Estate Exit Strategies: Single-Family Vs. Multifamily Investing

Real Estate Exit Strategies: Single-Family Vs. Multifamily Investing

There is one question related to real estate investing that has persisted for decades: which is a better exit strategy, single-family or multifamily properties? While they are both unique in their own right, each can provide a great ROI if approached correctly. Single-family properties offer more opportunity based on the quantity while multifamily properties can offer higher returns. It really comes down to the type of investment you want to make. Like anything else you do in real estate, you need to do your due diligence on the specific opportunity to see if it is right for you.

The most popular investment strategy for a majority of investors, particularly new ones, is single-family properties. In the current market, where the lending landscape is still difficult, there are many more opportunities for single-family properties than on those of the multifamily nature. Instead of putting down 25-30% for a three family house, you can get into a single-family unit for 10-15%. The purchase price for a single-family house is also much lower on average than one with multiple units. With many of the steep purchase discounts given to those houses that need work, it is essential to preserve capital.

Another reason that single-family properties are such a popular investment is that you can acquire multiple houses over a long period of time. There are investors that have bought just one single-family house over a ten year period and have a built quite a portfolio. Instead of putting all of their eggs in a three or four unit house, they can spread out the risk through many different houses. It is also much easier to find a single tenant every nine months than it is to find four tenants. This keeps the property occupied and cash flowing at all times. Essentially, it makes for a much easier investment.

For every investor that focuses on single-family properties, there are others that exclusively entertain multifamily properties. Instead of closing ten individual single-family transactions, they can get to their ten units in as little as just one deal. Even if they close two four-family properties, they can scale more quickly. This comes at a higher cost per property, but there is something to be said in closing only a few deals a year rather than trying to close multiple deals to get to the same point. It is also easier to manage two physical locations rather than scrambling around managing ten. If you can get the same number of rent checks coming in, but only have to focus on a handful of properties, it is more appealing.

Having multiple units also increases your chances at collecting rent every month. If you have one single-family property and the tenant stops paying, you have no other source of income for that property. On multi-unit properties, you have multiple tenants that will theoretically pay you rent every month. One tenant that stops paying on a ten unit property will not send you into delinquency. It is less expensive to own a multi-unit property than most people think. Even though you have additional units, you still only have one roof, one yard, one driveway and one basement.

There is also much greater upside potential on a commercial property than with any single-family one. When you decide to sell a single -family house, you are largely at the mercy of the market and the comparable sales around you. If the area is depressed, you can have the nicest home on the block but your comparables will dictate a lower sales price. With commercial properties, you can offset a shift in the market by using market rents as a way to calculate value. If rents are strong, they will be the most important factor that buyers look at.

You can also see higher values on a multi-unit building than on most single-family properties. A single-family property can offer a greater return, but if you buy a commercial building or a multi unit property they can appreciate much quicker than any single unit. While you can build a nice portfolio with single-families, you can build real wealth if you focus on properties with more units. The obvious drawback with this strategy is that it will cost money to make money. The cost of these properties is much higher than the average single-family. You also need strong credit scores and much higher down payment to get started.

Instead of focusing on the number of units, evaluate the opportunity itself. Just like investing in the stock market, it is best to diversify your portfolio. This often means a mix of current flip deals, coupled with long term single-family holds and a few commercial properties. This will give you a mix of each, and a safety net in the event that something happens with one of your properties. In the meantime, there are many single-family properties readily available that can jumpstart your investing. You can slowly work yourself up to a commercial property, but know that unless you have deep pockets this will take time.

Deciding among single-family or multifamily properties is largely about personal preference and goals. They both may work for some investors and not work for others. Either way, there is opportunity to make money in whatever investment you decide.

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