Multiplex Versus Single Family Homes

The question comes up often. Which is better — to buy a single family home or a multiplex? Unfortunately, the answer is not that easy. As always when investing in real estate it is a very personal question that depends on YOUR personal dreams, goals, resources ….

As an empire builder, my next foray into real estate investment will be a multiplex. My dream at our next duty station is to live in one unit and rent the other units out. As the market is changing in the single family world, I have found that this question is arising more and more. Do you buy a single family home or look at a multiplex? Honestly there is no easy answer because, as always, it is a personal decision. The key to making any important decision is to evaluate both the investment product and your goals.

6 Things to Consider When Evaluating Single Family Homes Vs. Multiplexes

1) Are you leveraging your investment?

Our number one reason for buying a multiplex is leverage. We get four houses for one mortgage. That means if you make it a principle you can get four units, whereas with a single family it is only one unit at a time. I can potentially live rent free with three units paying my fourth unit off.

If I was speaking with a different investor such as a cash investor, a multiplex would make less sense as there would be no mortgage. The leverage of four units for one is not needed. Often times the CAP or rate of return on a multiplex is pretty close to single family homes. Therefore, if the need to reduce your mortgage is not there, a multiplex might not make sense for you. One of the reasons we bought single family homes in the beginning was because they were cheaper or the same price per unit.

The thing that I realized the hard way was if I wanted to grow as fast as possible having multiplexes made more sense because I could grow four times as fast. Therefore, leverage and four for one is imperative. Again, that is because I am an empire builder who wants to grow as quickly as I can now so I have more long term growths. If growth and mortgages are not your goals, it’s important to look at your rate on rate of return since four plexus might not be the best returns.

2) Have you used up your FHA or VA loan?

A single family home can qualify for 5% conventional loans. Unfortunately, as far as I have been told, these types of loans do not apply to 2+ units. Therefore, once you use up a FHA or VA loan, you have to put 20% down on multiplexes unless you have more than four, and then it’s 25%. On the other hand, single family homes can still put 5% down. I am an investor who likes to leverage as close to 100% as possible. If we cannot continue to find other smaller down payment financial opportunities for multiplexes once we use up our FHA loan, it will make the multiplex harder to invest in.

3) Passive or hands on?

A multiplex means more units, which means more people. As a self manager, I strive really hard to make my investments as passive as possible. That is why I have a 16-page lease. The goal of my lease is to prevent the “lets talk about it” and make any issues black and white. Still, as someone who currently owns seven houses and manages 10 including family, more houses means more people. It means more unique situations and ultimately more out of the box situations. So if your goal is purely money for the least amount of time, four families for one “house” might not be worth it.

4) Cash flow is important.

With a multiplex the cash flow is the key. The reason why we plan on investing in a multiplex is for the cash flow. The fact that one house can generate four rents on one mortgage is what we like. In the area where we have been looking, 2.75 units cover the expenses of the whole multiplex. That means I can control cost as I do with my single family homes.

5) Lack of appreciation.

Typically multiples don’t appreciate as quickly as single family homes. Therefore, cash flow is going to be very important, along with acknowledging that multiplexes will have more people and therefore are potentially more expensive.

6) Long term investment with a smaller pool of investors.

Single family homes fall within the stereotype picket fence American dream. That means they are the most desirable and requested on resale. Mutliplexes, while fewer, are also typically less desirable. In the long term, you are going to find investors and those looking for cash flow to be the most interested in these units. Therefore, increasing interest rates could affect the price. It could also take much longer to sell the unit. That’s why I am buying the units for long term. The goal is for them to pay themselves off and become cash cows. I want to leverage the low cost of debt now. On the other hand, if my goal was to sell in a shorter term before the slower appreciation/cash flow paid off the unit, I would be less interested in the units.

At the end of the day, this question comes down to YOUR goal as an investor. We have two reasons for investing in real estate:

1) It allowed me to work from home as soon as possible while still aggressively investing in real estate.

2) It helps us fund early retirement.

This is why we need a mix of units that will aggressively add cash flow to our portfolio along with slower growing singe family homes that will appreciate. Since part of my plan is to quit my job, the extra income is worth the extra hassle. On the other hand if you are simply looking for a side investment that compliments a crazy work and family life, the extra income probably wouldn’t be worth the hassle.

At the end of the day, real estate is a marathon. The key is for you to figure out what type of terrain will allow you to sustain the journey for the indefinite future.

Where do you currently invest today and do you plan on changing that in the near future?