Pros and Cons of MF vs SFR
Many property investors start out with single-family rentals because they’re easier to acquire and more familiar. As your unit count grows though, you may want to consider buying multi-family properties.
A multi-family property may consist of units in a building with a common entrance or units with separate entrances. Several of either building type may be grouped together in a complex
So what are the pros and cons of investing in SFRs vs. MF rentals in the Metro Detroit market? If your aim is to grow your portfolio over time to achieve financial freedom, here are some of the key ways that the type of properties you buy can impact that goal:
Single-Family Rental (“SFR”)
SFRs (or single-family homes) are houses built on a single lot, with no shared walls, containing anywhere from 1-4 individual units.
● Larger Inventory
There are more SFR properties than MFR options on the market in Metro Detroit. This means you have a higher chance of finding better and more consistent purchase deals. On the whole, single-family home values are growing faster in the US housing market than multi-family, and they also are in higher demand amongst renters, with experts forecasting continuous growth for SFRs in the coming years.
● Lower Barrier to Entry
The average SFH is more affordable than a MF property, mainly because it’s just one home instead of a whole building – in some cases, the capital needed to buy an SFH is 10x less than an MF property. You also have the option to buy using government-backed loans (e.g. Fannie Mae and Freddie Mac), which have the lowest rates of any type of mortgage.
● Easier to Geographically Diversify
Since each SFR is a separate property, you can easily diversify your portfolio by spreading them across different locations with varied market characteristics. You can invest in some for cash flow, some for appreciation, and some for both.
● Better Quality tenants
Statistically, you’re more likely to get a family in a SF unit, so they’re more likely to treat the property more like they would their own home, compared to tenants in MF properties. They also usually stay in place longer, resulting in lower turnover rates and simpler maintenance schedules for the property.
● Simpler Managing
If you only have a small number of SFRs, management is easier, because you have fewer tenants and only a few housing units to maintain and manage. With a MF property, you have to maintain common areas and outside areas. Whereas with SF, there’s nothing for you to maintain on an ongoing basis – this is all the tenant’s responsibility.
● More Flexibility
You could buy one SFR a year and build a sizable cash-flowing portfolio in 10-15 years. And whenever you need to liquidate, you can sell one of your properties without jeopardizing the whole portfolio. Whenever the market conditions are favorable, you can choose to sell one of your SFRs for a higher return, and reinvest in other markets.
● Multiple Selling Opportunities
Reselling is generally easier for SFR homes than with MFR, because they appeal to a wider range of end buyers. SFHs can be sold to owner-occupants, landlords who are expanding their portfolio, flippers – the list goes on.
● Weaker Ability to Scale
Since SFRs are bought one at a time, it can take longer to scale a portfolio investing in this property type than with multi-family, where you can buy multiple units in one building at once.
● Limited Mortgage Loans
If you’re using external financing to purchase your SFH, mortgage loan companies like Fannie Mae have capped a maximum of 10 properties per person. Beyond that, you have to apply for commercial loans.
● Distance Scatter
If your properties are in different locations, managing them all can be physically challenging. Driving to them for inspections, attending to tenant concerns, handling turnovers – all of these tasks will require more time and energy if your properties are far apart.
● Impact of Vacancies
Unlike an MF property, where there are other occupied units to compensate for a vacancy, an empty SFR can represent a significant loss for landlords with a smaller portfolio.
● Market-Dependent Values
The value of a single-family property is tied to the real estate market, led by comparables (a list of recent asset sales) and market conditions.
● Efficiency of Investment
Investing is all about balancing the time, energy, and money you spend with your ROI. With multi-family rentals, though it might take more work to find a suitable property to purchase, it still takes less time and energy to acquire 20 units this way than to buy 20 single-family rentals.
● Efficient Management
Unlike SFRs, where your properties are spread out, MF rentals are lumped together in sets. So managing them (especially if you’re self-managing) is more time and energy efficient. You can attend to multiple inspections, tenant requests, turnovers, and other tasks all in one visit.
● Less Impact with Vacancies
Since there are many units per property, when one unit is vacant, you still have the other units to compensate for the revenue loss.
● Economies of Scale
Managing is generally more productive and profitable (giving better ROI). One renovation or improvement can add value to all the units. The same goes for repairs: if you need to fix the roof, there’s only one roof to fix (and only one insurance policy).
● Control of Value
While the value of single-family properties depends on comps, the value of multi-family properties is based on their net income. So, if you’re great at managing your properties, you can better insulate your value fluctuations against the market (but only if you manage well). This means that landlords can have more control over their income and asset values, and have the ability to adjust rents, improve operations, and augment income with facilities like laundry, internet, etc. A simple reposition or improvement of your building can therefore bring in substantial returns quickly.
● More Financially Challenging
You won’t be buying one home, but a lot at once. That means it takes more capital to invest in an MF property than a SFR, which is why some investors choose to team up with a partner to make a MF purchase. Plus, since a MF property will have five or more units, you’ll need to go through a private bank to acquire financing.
● More Difficult to Geographically Diversify
It’s one big property, so you cannot diversify your investments easily, unless you buy a lot of MF properties.
● Tenants are More Varied
MF rentals tend to have more short-term tenants, who see the property as just an interim home – ergo, they might not care for the property as well as a single-family renter would. Since you’ll have more tenants, they will be more varied, too, in terms of their needs and the kinds of issues that will arise when managing.
● Harder to Self-Manage
Unless your real estate business is your full-time job, you most likely need to hire a PMC to manage the property and the tenants properly. If you’re the type who would instead manage them yourself, you’ll have to be willing to sacrifice a lot of time screening applicants, crafting leases, dealing with tenant issues, turnovers, and maintaining all common areas (like hallways and outdoor areas) yourself.
● Less Flexibility
Unlike SFHs, which are individually bought and sold, you can’t just sell one unit from the building, which means less flexibility in your real estate portfolio.
● Laimited Selling Opportunities
Reselling at a profit is harder than with single-family properties, because there are fewer buyers of MF rentals. A smaller pool of buyers also means it may take quite a while to sell.
It’s really up to you – what fits your investment strategy? How much time are you willing to give up to manage your properties? What benefits do you want to prioritize? Some people even choose to invest in both kinds of rentals, since each provides different advantages.
But if you’re hoping for a passive income source, you shouldn’t self-manage your properties. Whichever type of property you decide on, both eat up a lot of time, meaning self-managing is a very hands-on investment, rather than a way of generating passive income. Hiring a property management company, whether you go for a single MF rental or build a portfolio of SFRs, is the only way to gain financial freedom through rental investing without sacrificing your own time.
Would you rather invest in SFRs or MF rentals? Leave a comment and let us know why.
Image Courtesy of: George Becker