As a 15-year real estate investor, I’ve invested in both single-family income property and apartment buildings.
Apartments garner attention as wealth creators, and as well they should. Their economies of scale look fantastic when an investor analyzes a P&L (profit-and-loss financial projection) spreadsheet.
But these P&Ls are mere projections. They’re trying to forecast the future.
When an investor holds a property for a number of years and then sells it, rarely do they perform forensics – a backward-looking evaluation on their rate of return. Few calculate what actually happened after factoring in appreciation, rent income, principal paydown, taxes, and all expenses.
Interestingly, for buy-and-hold income property, I often find that my income single-family residences (SFRs) have performed better than small to medium-sized apartment buildings.
There is a reason that a few years ago, Warren Buffett told CNBC that he would buy up “a couple hundred thousand” single-family homes if it were practical to do so.
Apartment buildings have some certain advantages over SFRs. But let’s look at why investing in SFRs can often be more profitable for you than investing in apartments.
- Tenant quality. SFRs attract a better quality of tenant.
- Appreciation. Properties appreciate better over time.
- Neighborhood. Your property tends to be in a better neighborhood.
- School district. You’re more likely to be in a better school district.
- Retention. Tenants tend to stay longer because SFRs “feel like their own”. More frequent vacancy, turnover, and make-ready expenses are an underestimated killer on apartment investor profits. Better neighborhoods and school districts aid tenant retention.
- Common areas. There are no common areas to clean and maintain. Apartments have hallways, stairs, and laundry rooms that a custodian must service. This is another overlooked profit drag that apartment investors miss in their P&L.
- 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 stuck with utility costs.
- Divisibility. What if you’ve got property that’s underperforming? With 10 SFRs, you can sell the one or two that are underperforming. With a 10-unit apartment building, you’ve got to keep all the units or sell all the units. It’s not divisible.
- Pestilence. Apartment building agents and promoters don’t want me to bring this up. If one tenant attracts a cockroach or bedbug infestation – the latter of which is becoming more prevalent – this quickly becomes a diffuse condition across the entire building. I recently had a tenant bring bedbugs into a 9-unit apartment building of mine. Tenants fled. Extermination fees alone were in the 5-figures. In an SFR, pests are more easily controlled.
- Fire. Even if adequately insured, apartment fires affect multiple units and families. With SFRs, this risk is mitigated.
- Drug dealers. We’re really getting nasty by now, aren’t we? In an apartment building, one drug-dealing tenant can disrupt multiple families. Again, apartments attract lower quality tenants.
- Financing. Income SFRs have both lower mortgage interest rates and lower down payment requirements than apartments. A husband and wife can each get 10 SFR loans (20 total) at the best rates and terms through Fannie Mae / Freddie Mac with 20% down payments. There are other financing options once these first 20 loans are exhausted. Apartments rarely, if ever, have 30-year fixed rate terms like SFRs.
- 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.
- Management. If you hire professional management, your manager would likely rather deal with SFR-dwellers. If you’re self-managing (which I hope you don’t do for long), this is a demographic that you would likely rather handle too.
- Supply and demand. Today, contractors are building many new apartments. They rarely build the low-cost SFRs that make the best rentals. Rental SFR demand vastly exceeds supply. This will continue to be true in both the short and intermediate-term.
- Market risk. This is another overlooked criterion. You must keep your rentals 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 one metro market’s economic fortunes. With 10 SFRs, you could have four in Birmingham, three in Dallas, and three in Jacksonville. (National SFR property and relationships with reputable property management firms can be found at www.GREturnkey.com.)
- Exit strategy. Years down the road when it’s time to sell your income property (hopefully after years of handsome profits!) there will be a much 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.
Interested in learning more? On Episode 140 of my popular Get Rich Education podcast (Robert Kiyosaki and the Rich Dad Advisors have appeared as guests many times), a guest and I discuss the distinct advantages of investing in single-family income property.