Single-Family vs. Multi-Family: Which is the Better Investment?

Mike: Welcome back to the FlipNerd.com REI classroom, where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.

Michael: Hey there. My name is Michael Blank and I’ll be your instructor today. Today, we’ll be talking about what’s a better investment, a single-family house or apartment buildings?

Mike: This REI Classroom real estate lesson is sponsored by uglyopportunities.com.

Michael: So I’ve done all kinds of different things. I’ve flipped about 30 houses. Hell, I’ve landlorded. I’ve done lease options. Good grief, I’ve negotiated short sales, and I also have done apartment buildings. So I have a unique perspective on this. So I think the conclusion is up to you, but I’m going to give you pros and cons to consider because we’ll all figure what is the best real estate strategy here? So here are some things. There are six kind of factors that I consider, and then I’ll kind of note it out at the very end, okay?

So factor number one is affordability. Single-family houses have this beat because they’re more affordable. You need less money and they’re obviously much more affordable. And apartment buildings, obviously, are not. They require more capital.

Let’s talk about the second factor, which is control over value. What do I mean? Well, with single-family houses, the value really is controlled by comps, comparable sales. With apartment buildings of five units or higher, which is commercial real estate, it’s not like that. It’s actually a multiple of income. In other words, imagine this ATM machine spitting out a certain amount of income. And then that box now is worth a multiple of that income, meaning that if the income goes up, then the value of the box goes up as well.

Which means that I can control the value of the building. I can go in and pay fair market value for a building, do a bunch of stuff to it, increase the income, and now all of a sudden, it’s worth more. So that’s the control of value. So apartment buildings kind of win that slot.

Finding deals. Since there are many more single-family houses in the world than apartment buildings, it’s obviously easier to find deals. So if you wanted to buy a single-family house, you could probably do that within three to six months. Apartment buildings, because there are less of them, they’re going to take longer. It might take 12 to 24 months, possibly, to buy an apartment building if you’re just getting started. If you’re already in the business, it oftentimes requires much less work.

So moving on to the fourth one, property management. Single-family houses normally are much harder to manage. They’re normally spread all around town and most people will try to manage those themselves. And with apartment buildings, property management is kind of built into the business model. Very few people insist on running their own apartment building. So it’s kind of built into the model. And you can hire a property manager company for a single-family house, but it’s much more expensive as a percentage of the rental income. So property management, it is built into the business models for apartment buildings.

Let’s look at the fifth criteria, the ability to sell. I want to be able to sell this stuff. So you may have seen a portfolio of single-family houses. They come up every once in a while. So let’s say I have 20 single-family houses and I want to sell that versus a 20-unit apartment building. Selling a portfolio of houses is much, much harder. It’s very hard to do. Most people end up liquidating one house after another. So they accumulate one after another in order to sell it and get the maximum value. They’re really selling one at a time versus selling the whole thing. Obviously, with an apartment building, you can sell the one building, one transaction and you’ve sold all 20.

Number six is the ability to scale. And this is really important. If I want to, let’s say, retire in three to five years and I need a certain amount of passive income, and you do the math on this stuff, you might need a whole bunch. You might need 30 or so houses. I’m just kind of throwing a number out there. You need a lot of houses. So you’re constantly buying, a lot of transactions. Versus with apartment buildings, I might be able to do a small part of the building, let’s say a 10-unit, and do the second one, let’s say with 20 units. So now I’m at 30 units in two transactions. Right? So I now have the ability to scale much more rapidly with apartment buildings than I do with single-family houses.

So those are some of the considerations. Now, the bottom line, guys, is this: you’ve really got to think about what your goals are. If you want to slowly build passive income and long-term wealth and you’re buying a single-family house one per year for 10 years and you have 10 after 10, good for you. That’s awesome. I think that’s a great, great plan. But if you want to retire, like, really retire in three to five years or whatever, and you want $5,000, $7,000, or $10,000 of passive income, do the math of how many single-family houses you need to achieve that goal.

You’ll be probably stunned at how many single-family houses you would need, and think about you owning that many single-family houses. First, you’ve got to find them all. But owning, there are a lot of people who burn out in the single-family house investing and go to apartment buildings because it’s so much work. So think about, really, what your goals are. Also, if your goal is passive income single-family house while flipping certainly is not passive. Wholesaling is not passive. Landlording is passive, but again, property management is a challenge. So if you’re going that route, then make sure you have a property manager to run those.

But apartment buildings is really, I think, somewhat the best way to achieve your financial goals. You can scale it. It’s passive income. It’s the easiest business in the world to finance. It’s also the easiest business you can learn, replicate, and do yourself, more than any other business, and I’ve done a bunch of them. So this is why I think if your goals are literally of the retirement nature, then I think you should take a real strong look at apartment buildings. So anyway, those were some pros and cons, single-family house versus apartment buildings. Hope that was helpful. I’ll catch you on the next episode.

Mike: HomeVestors, the “We Buy Ugly Houses” folks, is a franchised system of hundreds of real estate investors that have purchased over 65,000 houses. If you’d like to learn more about the most powerful real estate investing system in existence, whether you’re a pro looking to take your business to the next level or whether you have no experience at all, but a burning passion to be successful in real estate investing, please visit FlipNerd.com/ugly to learn more.

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