10 Single Family Rentals vs 10 Unit Multifamily Property

Single-family rentals vs. multifamily property: which is better? In this video, we compare the pros and cons, covering factors like scalability, vacancy risk, cash flow, and tax benefits. Gain personal insights and a detailed numerical analysis to see which investment is the best for generating wealth.

Pros and Cons of 10 Single Family Rentals

First, let’s consider the advantages of owning 10 single family rentals.

Easier Financing: Typically, you can put down a smaller percentage, making single family properties more accessible. With as little as 5% down, someone with a steady job can enter the single-family rental market and build from there.
Easier to Sell: Single family homes draw a broader spectrum of potential buyers as they can be purchased either as investments or for personal residence.
Diversification of Location: By spreading out ten homes across different areas, you can benefit from regional economic growth.
Longer Tenant Stays: Tenants often stay longer in single family homes, averaging three to four years.

However, there are downsides to owning multiple single family homes:

Management Complexity: Managing 10 separate properties in different locations, with different tenants can be challenging.
Slower Scalability: It can take considerable time to scale up from one property to ten and even longer to double it.
Vacancy Risk: Single-family homes have a 100% vacancy rate once a tenant moves out, impacting cash flow significantly.
Higher Cost per Unit: Compared to multifamily options, single-family rentals a higher cost per unit, often leading to narrower profit margins.

Pros and Cons of a 10-Unit Multifamily Property

Now let’s examine why some investors might favor a 10-unit multifamily property:

Economies of Scale: Managing one building with ten units is more efficient—one roof, fewer resources, and a single mortgage.
Steadier Cash Flow: A multifamily property has lower vacancy risk with generally steadier cash flow due to reduced vacancy impacts. Even if you lose a few tenants, the remaining units can still provide income.
Forced Appreciation: Multifamily properties (five units or greater) benefit from forced appreciation; as the net operating income increases, so does property value. Every dollar increase in rental income forces the property value up.
Significant Tax Benefits: The tax benefits are substantial, offering depreciation and potential for better cost segregation, making these investments alluring to savvy investors.

Multifamily investments also present drawbacks:

Higher Initial Cost: Acquiring a multifamily property requires a substantial down payment. You can gradually build single-family homes but need significant upfront capital for a multifamily property.
Location Sensitivity: All units are in one place, which ties risk to that specific area’s economic health and market shifts.
Limited Buyer Pool: Finding buyers for larger properties can be more challenging because fewer people can buy a 10-unit property compared to a single-family home.
Higher Turnover: Tenants in multifamily properties tend to stay for only one to two years, resulting in higher turnover rates.

Cash Flow Comparison: Single Family vs. Multifamily

Suppose you spend 1.5 million on both a series of 10 single family homes and a 10-unit multifamily property. Which investment offers better cash flow?

10 Single-Family Rentals:

Purchase Price: $150,000 each, totaling $1.5 million for 10 homes.
Down Payment: 25%
Interest Rate: 6% over 30 years
Rent per Home: $1,500
Total Monthly Rent: $15,000
Expenses: Approximately $600 per month per home (40% of rent)
Net Operating Income (NOI): $9,000 (Total Rent – Total Expenses)
Mortgage Payment: $6,750 (Based on 6% over 30 years)
Monthly Cash Flow: $2,250 (NOI – Mortgage Payment)

Ten homes bought at $150,000 each with a total investment of $1.5 million can generate monthly cash flow of $2,250 after expenses and mortgage payments, based on rents of $1,500 per home.

10-Unit Multifamily Property:

Purchase Price: $1.5 million
Down Payment: 25%
Interest Rate: 6% over 30 years
Rent per Unit: $1,200
Total Monthly Rent: $12,000
Expenses: Approximately $3,600 per month (30-35% of rent)
Net Operating Income (NOI): $8,400 (Total Rent – Total Expenses)
Mortgage Payment: $6,750 (Same as the single-family rentals)
Monthly Cash Flow: $1,650 (NOI – Mortgage Payment)

A $1.5 million 10-unit property, can generate monthly cash flow of $1,650 after expenses and mortgage payments, based on rents of $1,200 per unit.

Real-World Cash Flow Analysis

The 10 single-family rentals generate a higher monthly cash flow of $2,250 compared to the $1,650 from the 10-unit multifamily property. However, this difference is only on paper. In reality, a 10-unit multifamily property will likely cash flow better over time than 10 single-family rentals. Here’s why:

Vacancy Costs: When a single-family rental becomes vacant, the turnover cost (changing carpets, repainting, cleaning) can be around $2,700. Additionally, it can take 45 to 60 days to find a new tenant, resulting in another $3,000 in lost rent.
Efficiency: It’s easier to manage and systematize one building with 10 units compared to 10 separate homes. Re-renting a vacant apartment unit typically takes two to three weeks, compared to the longer turnover time for single-family homes.
Tenant Turnover: Multifamily properties often have deposits from new tenants before the unit is ready, reducing the time it’s vacant. This efficiency leads to less downtime and more consistent cash flow.

Real-World Experience: Though single-family homes may initially appear better on paper, the long-term cash flow often favors multifamily properties due to expenses, rent, and system efficiencies. Many investors with multiple single-family homes struggle to retire or scale due to inconsistent cash flow and high turnover costs. As a result, more investors are shifting to multifamily properties as a path to financial independence.

Why I Made the Switch to Multifamily Properties

I’ve owned both single-family rentals and multifamily properties. Years ago, I transitioned to multifamily properties, and here’s why: less headaches. To put it simply, would you prefer to manage 10 roofs or one? Maintain 10 mortgages or just one? Keep books for 10 properties or one? I used to juggle multiple single-family rentals, and it felt like a never-ending task. The reality is that the optimal use of a single-family home is not as a rental property but rather for an individual or family to live in. This fundamental difference led me to transition to multifamily properties. Once I made the switch from single-family homes to multifamily properties, I never looked back. Multifamily properties can turn around units quicker, minimize vacancy losses, and when operated at scale, offer more reliable cash flow, allowing investors to capitalize effectively over time.

Tax Benefits Comparison

When comparing single-family rentals and multifamily properties for tax benefits, multifamily properties often come out on top. We’ll examine depreciation, cost segregation, and 1031 exchanges to show why multifamily properties tend to offer greater tax savings and a more efficient investment strategy.

Depreciation:

Single-Family Rentals: You can depreciate each home over 27.5 years. However, the depreciation benefit is less impactful since it’s spread across multiple properties.
Multifamily Property: With one multifamily building, the structure has a higher value proportion versus the land. Therefore, the depreciation benefits are more significant and impactful, providing better tax savings.

Cost Segregation:

Single-Family Rentals: You can perform cost segregation on single-family homes, but the savings are minimal.
Multifamily Property: Cost segregation is a method to accelerate depreciation on certain parts of the property. (like appliances, carpets, and fixtures) over shorter periods (5, 7, or 15 years). This results in substantial tax savings for multifamily properties because of the higher cost basis and multiple units.

1031 Exchange:

Single-Family Rentals: You can defer paying capital gains taxes by selling a single-family rental and using a 1031 exchange to buy another property. However, doing this for multiple single-family homes can be complex and time-consuming.
Multifamily Property: It’s much simpler to use a 1031 exchange for one larger property. For multifamily investors, upgrading to larger properties becomes a streamlined process, deferring capital gains taxes while exponentially increasing property value and cash flow potential.

Key Takeaway: Multifamily properties provide more significant and streamlined tax benefits compared to single-family rentals. The higher depreciation, cost segregation benefits, and easier use of 1031 exchanges make multifamily properties a more tax-efficient investment.

Paving your Path to Financial Freedom

While single-family rentals have their benefits, such as easier financing and resale, they come with significant challenges. Multifamily properties, however, stand out with economies of scale, steady cash flow, forced appreciation, and significant tax benefits. Despite needing a higher initial investment, multifamily investments offer scalable growth, making them a superior choice for building long-term wealth.

If you have any questions, post a comment below or text PETER to 833-942-4516.

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