10 Reasons Apartments Outshine Single Family Homes in Real Estate Investing

January 16, 2024

Both single family and multi-family real estate investing are great paths to building long-term wealth. But apartment investing has some distinct advantages.

I own both single-family rentals and apartment buildings, and I’ve had success with both. Single-family rentals (SFR for short) do have some unique advantages, including high appreciation potential, longer loan terms, and more exit strategies. But I’ve come to the conclusion that apartment investing is the superior long-term strategy, especially if you want to really scale a portfolio.

Here are 10 reasons why apartments claim the upper hand:

Economies of Scale: The biggest advantage of apartments lies in economies of scale. Managing multiple units in one location creates significant efficiencies and cost savings. One roof, standardized appliances and systems, onsite property management all make apartments easier to manage. Large single-family home operators are trying to replicate these efficiencies by building entire communities of single-family homes for rent, known as “Built to Rent.” But it’s really hard to beat the scale efficiency inherent in apartments. In my own experience, the workload managing SFRs is proportional to the number you own. In other words, no scale.
Better Cash Flow: Apartments are designed as investment vehicles. If they aren’t producing cash flow, something has gone very wrong. In contrast, single-family homes were built for homeownership. Cash flow from SFRs only occurs when the home’s price is comparatively lower than the rent you can command (low price-to-rent ratio). Even with an ideal SFR property, cash flow tends to fluctuate significantly. Cash flow from multifamily is not only more consistent but also more resilient to vacancies. A vacancy in an SFR puts you in the red quickly.
More Control Over Appreciation: SFRs derive their value from comparable properties, leaving investors at the mercy of local market fluctuations. Apartments, on the other hand, derive value primarily from the income they generate. There are more ways to “force appreciation,” with apartments, such as enhancing amenities, charging for storage, or upgrading units. That income directly impacts value.
More Recession Resistant: In times of economic uncertainty, real estate values fluctuate, with SFRs proving more volatile than multifamily properties. Apartments, which tend to be more affordable, exhibit greater resilience during economic slowdowns, as was the case during the Great Recession. They also tend to outperform other real estate asset classes, including office, industrial, and retail when the economy sours.
Better Loans: Properties with five or more units require commercial loans, which have advantages and drawbacks compared to SFR loans. Commercial loans are harder to qualify for, have shorter terms, and often have prepayment penalties. Yet, apartment loans typically boast lower interest rates and can be non-recourse, shielding the borrower unless fraud is involved. Payments can be interest-only for a certain period, and these loans are often assumable, enabling new buyers to take over the loan from the seller. The Clara Investment Group’s recent apartment deal came with a 3.25% loan because the loan was assumed.
Tax Advantages: Both single-family and multifamily real estate boast remarkable tax benefits, including 1031 exchanges and depreciation. One of the biggest tax advantages is the ability to accelerate the depreciation of an asset through a process called cost segregation. But for SFRs, cost segregation is expensive, so most owners don’t do it – and miss out on a huge benefit. The last apartment deal Clara did came with a 200% year one depreciation. Meaning an investor that contributed $100k could take a $200k year 1 loss on their tax return! You can’t do that with SFRs.
Reasonable Entry Point: Apartments are obviously expensive, but usually, it takes less capital to get started in apartment investing compared to single-family homes. The average home in the US costs around $500k, but even if you only spend $250k, your 20% down payment is still $50k. With apartment syndications, where you buy a small part of the building, the minimum investments are often $25k to $50k. So the capital commitment is often less than buying a house.
Diversification: There’s also a diversification advantage of apartments. If you have $200k to invest, you could craft a fairly diversified apartment portfolio in different regions or asset classes. But buying four SFR properties (with $50k down payments each) in four different regions would be a pain in the butt. It doesn’t scale well. The alternative is focusing your SFRs in one market – but then that’s a lot of eggs in one basket.
Professional Property Management: My main beef with SFRs is actually none of the above. It’s property management. The core issue is that property management is a low-margin business. Low margins lead to underpaid and thinly spread workers who may not prioritize your investment (of course there are exceptions). I’ve cycled through many property managers, and it’s a pain and often causes underperformance of the investment. It’s easier to find professional management services for larger complexes. There can be problems there too, of course, but you don’t have to deal with them as a syndication investor!
Truly Passive: The decision between single-family homes and apartment syndications ultimately boils down to the tradeoff between control and the level of effort. While owning a property directly provides more control, apartment syndications are truly passive mailbox money. Syndications do require spending time upfront assessing the operator and investment. But then sit back and collect your checks. Relish the truly passive income while avoiding the day-to-day involvement with tenant issues, property managers, and maintenance issues.