Investing in real estate can be an exciting proposition, but you’ll need to decide if you want to invest in single-family homes or multifamily rentals. Both options have benefits and drawbacks, so taking a closer look at each option can help you make the choice that makes the most sense for your portfolio and your risk comfort level.

Cash Flow Potential

Whether you invest in a single-family home or a multifamily rentals, the goal of the investment should be to generate cash flow. For a single-family home, your potential cash flow is limited to just one unit. This means you can only generate income from one source every month, and tenant turnover may mean you’re left without cash flow for a number of months. There are ways to maximize cash flow on a single family home, to an extent, by renting the property out as a short-term vacation property instead of to a long-term lessee. However, using the home as a vacation rental may be risky, as you may not be able to book short-term tenants for every night of the month. 

With multifamily real estate, your cash flow is generated across multiple units. Even with a small apartment building, your monthly income can be significantly higher than with a single-family home. Having several units also means you can mitigate the risk of losing income; should a single unit become vacant, you still have revenue generating from the others in the building or complex. 
For comparison, average rental rates for single-family detached homes hit $2,330 per month in 2023. Average apartment rent rates sit at about $1,700. While the first number may seem more impressive, remember that the second would be multiplied by the number of apartments in the building or complex. Cash flow opportunities are greater with multifamily real estate.

Passive Income

Investors in both multifamily rentals and single-family homes seek to make passive income off their investments. Passive income is income you make outside of a regular job and that does not require a significant amount of labor. Investing in a single house may seem like an easy way to boost your monthly income, but some may find it’s not quite so simple. Purchasing a house to rent out puts you in the role of landlord, and that means handling renovations and repairs, collecting rents, seeking out new tenants if your current ones decide to leave, and handling all other aspects of the property. Investors in single-family homes may not be able to afford to hire a property management company, which means all the work falls on them. It’s not so passive after all. 

A multifamily real estate asset, on the other hand, can be a true source of passive income. The potential cash flow across multiple units or multiple buildings means you can absorb the cost of hiring a property management company. You can avoid stepping into the role of landlord while still reaping the benefits of your real estate investment. The property managers handle all aspects of the business, so you can decide how much you want to be involved, if at all. 

Portfolio Growth and Long-Term Appreciation

Both single-family homes and multifamily properties have the potential for long-term appreciation. A home purchased in the right neighborhood at the right time can command higher rents and grow in value, but this growth may be limited. With just one asset in your portfolio, you may find only moderate increases. Another challenge with investing in single-family homes is the limited opportunity for building your portfolio. You’ll need to keep adding homes to grow and diversify your portfolio, which can be a challenge for average investors. 

Multifamily real estate holds a greater opportunity for both long-term appreciation and portfolio growth. Apartment buildings purchased in secondary or tertiary markets can benefit from the growing populations and job markets in their areas, with demand for housing commanding higher rents across the board. Multiplying the rent market rate across the number of units may yield considerable growth, and the overall value of the investment can appreciate in value as the city grows. 

Investing in several multifamily assets to build a portfolio may seem daunting, but there are many investment vehicles available that let you put your money into several properties or groups of properties. For example, a REIT lets you pool your money with other investors to purchase shares in a portfolio of properties. These assets can be limited to a specific geographical region or they can be spread out across the country to help mitigate risk. Accredited investors can also take advantage of single-asset offerings, like those offered by DiversyFund. A single-asset offering pools the money from a smaller group of investors to purchase, manage, and eventually sell one multifamily real estate asset. You don’t have to have millions of dollars in the bank to invest in large-scale real estate properties, so you can have all the advantages of multifamily real estate investing while sharing the potential risks.

What it Means for Investors Like You

Finding the right balance for your investment portfolio means crafting an investment strategy that fits your needs and your risk tolerance level. While investing in a single-family home may be a good option for some people, you may find the benefits of investing in multifamily rentals meet your financial goals better. With opportunities for cash flow, passive income, and long-term appreciation, multifamily rental properties can make a smart addition to your portfolio. If you’re ready to begin building long-term wealth, click here to learn more about how DiversyFund’s offerings can help you.