Apartment buildings have economies of scale and other advantages over single-family rentals (SFRs). I own both types.
SFRs are my favorite. They might have the best risk-adjusted return anywhere.
Even after 2008’s Great Recession, those that bought for cash flow persevered.
In fact, SFRs have at least 15 distinct advantages over larger apartment buildings, some that you’ve never thought about before.
1. Tenant quality. SFRs attract a better quality of tenant. They take better care of the premises.
2. Neighborhood. Properties tend to be in a better neighborhood.
3. Appreciation. Properties appreciate better over time.
4. School district. They’re more likely to be in a better school district.
5. Retention. Tenants stay longer, creating less vacancy expense. Reasons 2 and 4 above are why they stay.
The next ten advantages are below. Also, I break down all 15 in detail in this video. If you watch on the YouTube app, don’t forget to hit the “Like” button. Watch here or click below:
6. Common areas. SFRs have no common areas to clean and maintain. Apartments have hallways, stairs, laundry rooms, and common outdoor grounds that a custodian must service. This is another overlooked profit drag that apartment investors miss in their P&L. (I missed this expense on my first apartment buy.)
7. Utilities. In SFRs, tenants often pay all utilities and even care for the lawn. The larger the apartment building, the more likely that you’ll be the one paying utility costs.
8. Divisibility. What if you’ve got property that’s underperforming? With 10 SFRs, you can sell the one or two that are not performing. With a 10-unit apartment building, you must either keep or sell all the units. It’s not divisible.
9. Fire & pestilence. Fire and pests are more easily controlled in SFRs. Even if adequately insured, these diffuse conditions often affect multiple units and families.
10. Financing. This is big. Income SFRs have both lower mortgage interest rates and lower down payment requirements than apartments. You can secure 10 SFR loans single, 20 married, at the best rates and terms through Fannie Mae / Freddie Mac with 20% down payments. Apartments rarely, if ever, have 30-year fixed rate terms like SFRs.
11. Vacancy rate. It’s true that if your SFR is vacant, your vacancy rate is 100%. If your four-plex has one vacancy, then your vacancy rate is only 25%; but the same is true if you own four SFRs and one is vacant.
12. Management. If you hire professional management, your manager would likely rather deal with higher quality SFR residents. If you’re self-managing, this is a demographic that you would likely rather handle yourself.
13. Supply and demand. There aren’t enough low-cost SFRs that make the best rentals. Demand vastly exceeds supply. This will continue in both the short and medium-term.
14. Market risk. This is another overlooked criterion. You must keep your properties filled with rent-paying tenants that have jobs. Think you’ll be able to buy ten rental units in the near future? Your 10-unit apartment building will only be in one location, leaving you exposed to just one geography’s economic fortunes. With 10 SFRs, you could have four in Central Florida, three in Dallas, and three in Memphis.
15. Exit strategy. Years down the road when it’s time to sell your income property (hopefully after years of handsome profits!), there’s a greater buyer pool for your SFR than your apartment building. More buyers can afford the lower price. Unlike apartments, you even have access to a pool of buyers that might want to occupy the SFR themselves. It might even be your current tenant that buys it.
Again, I really like apartment buildings too! They could be my second-favorite investment to SFRs.
I am still an active buyer of quality single-family rentals.
If you’ve considered getting started, don’t let this be like two well-meaning friends that repeatedly say to each other: “We should grab lunch soon.”
That’s a non-starter.
You can’t make any money from the property that you don’t own. Just copy me and buy where I buy. Get pre-qualified for a mortgage loan and find property through GREturnkey.com
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Very true. I like that there is much more potential buyer competition when selling an SFR vs. multi family.
A safe and easy exit strategy is very handy. I think it may be easier to get out of North Korea than to borrow money from my 401k.
I hadn’t realized it before, but you do make some good points about why a single family home is a great investment. The stuff about not having to worry about common areas is particularly true. After all, if you’re renting out an apartment complex then you still have to maintain areas like the lobby, hallways, etc.
Great points! I’ve considered some investments in small / medium apartment buildings but when I have considered the cost relative to the potential I’ve had hesitations. The idea of being able to turn most everyday maintenance needs over to the tenant keeps my interest in Single Family homes!
I like that you said that tenants tend to stay longer because single-family homes “feel like their own.” My husband and I are thinking about buying a single-family home to rent out because we think it would be a good investment and a good way to make a passive income. I think it would be smart because tenants would be more likely to stay longer, as you said, and I think it would also be less work than something like a vacation rental that would be seasonal so that would be nice too.
My husband and I are thinking about investing in a single-family home to have some extra income. I appreciate that you mentioned that single-family homes appreciate better over time. I think it would be a good investment for us because it would be a little more secure since they do appreciate so well.
It’s great that you elaborate on how buying single-family homes can be a smart way to invest your money. I’ve been searching for a good way to invest the money I have saved, so I’m considering buying a single-family home. I’m going to search for a good real estate agent in the area that can help me buy a single-family home.
Thanks for letting me know that single-family homes will be able to attract better tenants. My husband and I had been comparing different properties last night and were wondering what type would be a perfect rental. Now that I’ve read your article, I think that this type of property can provide the passive income we wanted.
It’s awesome that you point out that single-family homes have a tendency to appreciate in value over time. I’ve been looking for a smart way to invest my money, so I’m considering buying a single-family home with it. I’m going to see if there’s a good real estate agent in my area that can help me buy a single-family home.
Thank you for pointing out that single-family homes attract high-quality tenants as income properties. I want to invest my savings wisely this year, so I’m considering buying a single-family home to use as an income property. I’m going to search for a good real estate agent in my area that can help me purchase a single-family home.