Real Estate Investing: Single-Family vs Multifamily Properties

Real estate investing can be the most lucrative way to build generational wealth and establish financial security. The benefits are vast and with the right asset, investors can benefit from stable cash flow, great returns, diversification, tax advantages, and the ability to leverage real estate to build additional wealth. However, real estate is vast. Should you invest in single-family homes or multifamily rental properties?

As a busy physician, is it better for you to implement passive or passively active investment strategies? It’s a very important question that needs answering, but you should start with discovering which subclass of real estate best aligns with your lifestyle and financial goals.

To create the right investment path for you, a good place to start is by learning about the different investment options available in the investable universe.

As the saying goes, knowledge is power.

The more knowledge you obtain about real estate investing, the more prepared you’ll be for your investing activities.

For instance, even if you were to choose to passive real estate investment strategy, such as a real estate syndication, you’d still need to know how to evaluate a sponsor, understand the key terms, and what exactly makes an asset a good investment.

Single-family properties
(Image via Canva)

When most investors are starting out in their real estate investing journey, they’ll often choose a type of property they’re more familiar with, like residential real estate. It’s common for first-time investors to get their feet wet by investing in single-family properties. Once they’ve obtained more knowledge and experience, they’ll seek to diversify into larger assets, such as multifamily properties.

One question that often pops up in conversations with the doctors I talk to is, “Is it better, as a physician, to invest in single-family properties or in multifamily properties?”

The truth is though there is no right or wrong investment option for physicians.

It’s actually more about identifying what your personal goals and expectations are, then aligning them with an investment path that can benefit you the most in achieving them.

My recommendation, if you’re just getting started, is to obtain a working knowledge of the space. Learn as much as you can about the different types of investment options as well as their benefits and drawbacks.

Once you’ve established a layer of foundational knowledge, you’ll become better equipped to create a strategic investment path that aligns best with your overall goals and expectations.

There are numerous investment options in the investable universe. Although you don’t need to be an expert on every type of investment, it’s still beneficial to have basic knowledge in order to make well-informed decisions in your real estate investing journey.

Let’s start with learning about single-family and multifamily properties…

Real Estate Investing: Single-Family vs Multifamily Properties

A single-family home is designed to be used as a single dwelling unit that has its own kitchen, unshared walls, and unshared utilities. In most cases, it’s considered an independent structure that sits on its own piece of land. However, the U.S. Census Bureau includes certain attached dwellings, such as townhomes, in its definition of “single-family home”. 

As a result, for a dwelling that’s attached to other homes to be considered a “single-family home”, it must be separated from an adjacent unit by a ground-to-roof wall and able to function on its own as a single unit.

Alternatively, as the name suggests, a multifamily property houses multiple families. Any residential property with more than one housing unit, each with its own kitchen and bathroom, is considered a multifamily property. Multifamily homes range from two-family duplexes to apartment complexes with hundreds of units.

Whether you’re interested in investing in single-family or multifamily property, it’s good to have an understanding of the benefits and drawbacks of each subclass in order to discover which real estate investment is right for you.

Benefits of Investing in Single-Family Properties

  • If you own single-family properties and you need cash, you have the option to sell one off. On the other hand, if you only have multifamily properties, you can’t just sell a single apartment unit if you need to.
  • If you have a portfolio of single-family homes, you are able to use an income-driven approach when obtaining a valuation. This type of approach will help you harvest equity from the properties much easier than if they were valued via customary single-family home “comp” appraisals.
  • In general, rents are higher per door compared to apartments.
  • Single-family is also less consolidated than multifamily. With over 80 million single-family homes out there, less than 5% are owned by institutional investors.

Drawbacks of Investing in Single-Family Properties

  • With more square footage under a roof, you’ll have higher repair and maintenance costs. 
  • Unless you have a large portfolio, property management fees are generally higher as well. 
Multifamily properties
(Image via Canva)

Benefits of Investing In Multifamily Properties

  • You’re able to really drive appreciation with these types of assets as they are valued using an income approach. As you increase rents and decrease expenses, your NOI (net operating income) grows. 

NOI / Cap Rate = Value

  • You can scale a lot faster with multifamily. Let’s say you want to grow your portfolio by 20 units. With single-family, you’d have to deal with the hassles of finding and inspecting 20 different homes. However, with multifamily, it’s very easy to find an apartment building with 20 units. You are going to go through due diligence on every property you purchase. Going through it once with a 20-unit apartment complex is much more appealing than going through it 20 times with as many single-family homes. 
  • The multifamily market is vast and has drawn in a lot of good operators. As a result, you’ll have plenty of solid, reliable operators and property management companies to choose from.
  • Multifamily is an evergreen asset class. The favorable demographics for multifamily are baby boomers and millennials that prefer rentals over being homeowners. 
  • With a larger multifamily property, you can take advantage of economies of scale and it can support its own maintenance staff, grounds crew, leasing agent, etc.

Drawbacks of Investing in Multifamily

  • The multifamily market is very consolidated with a ton of competition. Roughly 55%-60% of A- and B-class multifamily homes are owned by institutional, private equity, and syndication investors.
  • As more “build to rent” single-family home developments come online, they will absorb a lot of potential apartment renters. 
  • Capitalization rates (Cap Rates) are very compressed.
  • A perceived barrier to entry.

Starting Your Real Estate Investing Journey

Compared to the academic rigors we’ve been through, understanding real estate investing isn’t necessarily difficult. However, you do need to have the proper knowledge to make smart decisions in your investing activities. 

Once you understand the benefits and drawbacks of the different types of investment that are available in the investable universe, you can begin to identify which path best fits you. The beautiful thing about real estate investing is you can tailor your investment path to you and your goals.

As you continue to educate yourself on different investment options, you’ll continue to move closer and closer toward creating an investment strategy where you can achieve your lifestyle and financial goals.

If you’re interested in learning more about investing in single-family or multifamily homes, or any other investment option, click here to schedule a free 30-minute call with me. 

I look forward to helping you create your path toward winning back your time! 

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