This is an age-old question that we get asked on an ongoing basis from real estate investors. Are you better off investing in a single-family detached home, or a multi-family apartment building? As with all thing in life, it depends, but hopefully I can shed some light on the subject to make your decision a little bit easier.

All things being equal, I prefer multi-family apartment buildings. There are huge economies of scale when you buy a 10 or 30 unit apartment building as opposed to a single family home. It’s like the game of Monopoly; you trade in 4 of your houses to buy a hotel.

Top reasons to buy multi-family rental apartment buildings instead of single-family rental homes;

1. Economies of scale. You have one roof, one boiler, one parking pad, etc. in one location. Everything is right there together, and you only have to fix it once for all units to benefit.

2. Property Management. When you start getting into larger apartment buildings, it becomes practical to have an onsite manager collecting rents, doing showings, etc. This is a huge time savings from a property management perspective.

3. The banks look at multi-family buildings as businesses, and will lend based on the financial performance of the building, unlike when you are purchasing a single family home and they are more concerned about your employment, credit, etc. With CMHC insurance, your rate can generally end up being even better than for a single-family rental property.

4. Equity take-out. It’s much easier to refinance a multi-family rental building and take out your initial cash investment than it is for a single-family home in the current lending environment.

5. Pooling of resources. Since multi-family buildings are difficult for most people to purchase outright on their own, and most people don’t have the experience or knowledge to run them, it makes raising funds and pooling capital a very viable option. Ask around, I’m sure you will find interest from many people that you mention the idea to.

6. Buying in a corporation. Most banks will require that you own the rental property inside a corporation, and this helps to limit your liability and potentially taxes. Currently, the majority of lenders won’t let you purchase a single family home using a corporate entity as they want as much personal protection as possible.

Those are the main reasons that I prefer apartment buildings to single family homes.

The downsides to buying a multi-family apartment;

1. Very often when you buy a multi-family rental property, there is some deferred maintenance, so keep in mind that cash flow will be tight for the first 5 years. You will need to ensure that you have cash available to take care of these projects.

2. Unlike single family homes, apartment buildings aren’t quite as liquid, so you should really have a long term focus of 5-10 years minimum hold.

3. Due diligence. Unlike single family homes that don’t require a lot of due diligence one you’ve bought a few, multi-family properties require a lot of due diligence.

4. The bigger the building, the bigger the bills. Don’t get caught by surprise here as things like elevators, boilers, roofs, balconies, etc. can really add up quickly and sink an under-funded investor.

5. Closing costs. The closing costs in a multi-family transaction can really catch people by surprise. Forecast 5% of the purchase price amount for this. Lender fees, legal fees (you generally pay both sets of legal fees), broker fees, inspections (much pricier than residential), and environmental fees can all really add up!

If you’re looking at some different options for real estate investing, don’t hesitate to reach out to our property management company here.

Chris Stepchuk, April 1 2017