One Door or Many Doors: Investing in Houses vs. Apartments
With an article title similar to a famous Hamlet quote, I knew I had to bring the facts clear and concise. With either choice, investing in real estate has many benefits. Let's discuss those benefits, finishing with a comparison of the two options for high net worth individuals determining which is right for them.
The Case for Multifamily Real Estate
Multifamily real estate (apartment complexes) can be a great opportunity for high net worth individuals for several reasons. They provide strong, stable cash flow — a predictable stream of rental income that's especially attractive for investors seeking reliable returns. They offer significant tax benefits including mortgage interest deductions, property tax deductions, and the most under-utilized deduction: depreciation, which can equal millions of dollars in write-offs. Over time, multifamily investments have historically appreciated in value, providing potential long-term capital gains. Real estate is often considered an inflation hedge, as rents and values tend to increase as the general cost of living rises. And finally, multifamily investments provide diversification — their low correlation with stocks and bonds reduces overall portfolio risk.
The Case for Single Family Real Estate
Single family properties can also be a good option for certain investors. They have lower entry barriers — most people have bought a house before, making them comfortable with single family as a first investment. There's typically high demand from the population's desire for homeownership, which can result in high appreciation rates. Single family homes in desirable locations offer real appreciation potential. And they provide flexibility to use the property as a primary or vacation residence in addition to the financial benefits. (Though note: you must be organized with taxes to ensure personal use doesn't offset investment benefits.)
Active Single Family vs. Passive Multifamily
There isn't a right or wrong answer overall, but here are the best questions to ask yourself:
How much capital do I have to deploy?
A basic investment strategy is to always invest in the largest investment you have the ability to purchase. Percentage returns can be the same, but a 20% return on $15 million will be a much larger dollar amount than 20% on $350k. The best part is that you can typically acquire the $15 million property with the same amount of your own capital by partnering with other investors.
How much time do I have to manage investments?
Single family properties do not usually provide enough gross rental income to afford a property manager and still be profitable. Multifamily properties, on the other hand, can provide hundreds of thousands of dollars in gross rental income each month — plenty to hire professionals to manage maintenance, marketing, and finances. If you have 20 extra hours each week to dedicate to investing, single family may work. If you want to use your free time for other things, multifamily will produce better results in both finances and stress level.
How much cash do I have for repairs and vacancy?
Every property will have times with no tenant paying rent, but the bills don't stop. You need funds to cover mortgage payments, utilities, taxes, and insurance during vacant periods. Just like your home, rental properties of all sizes have repairs. You need cash on the side to cover an $9,000 air conditioner replacement when it goes out in the middle of July.
How much experience do I have?
Like every profession, there's a “green” period when you're learning the ropes. The learning stage with your first few investments will either take more of your time or more of your money to achieve the same results as an experienced investor. General costs are also more expensive for inexperienced investors — lenders charge premiums because risk decreases as experience increases. Many multifamily lenders won't approve a loan for someone without previous multifamily experience.
Does diverting time from my profession make financial sense?
Many high income earners make $300+ per hour. Real estate is the same as any other profession — it takes years of real-world experience to gain expertise. The expert will always make more than the intern. If you make $300 per hour in your specialty, you need to decide whether it makes more sense to do your own internship in real estate (which may only pay $20 per hour in the early years), or to focus on your specialty and put your money to work with a team that's already an expert. Consider: doctors go through residency learning many specialties, then become attending physicians who are paid more per hour because of their focused expertise. At some point, it makes more sense to stay in your specialty and invest passively than to go back to being a “resident” in real estate.
Why Multifamily Wins for High Net Worth Investors
Historical data shows that multifamily strategies provide high net worth individuals with higher returns while doing less work. The advantages over single family are significant. Economies of scale mean operating costs spread over more units, resulting in lower costs per unit and higher net income — and when there's one vacancy, the other tenants cover the expenses rather than coming out of your pocket. Diversification across tenants and professions means that when one profession is in low demand, others are in high demand, offsetting risk during unexpected economic periods. Professional property management handles maintenance, repairs, tenant screening, and rent collection — especially beneficial for high net worth individuals without the time or expertise to manage personally. And scalability allows investors to grow their portfolio more quickly: acquiring $10 million in multifamily could be just one property, versus a large number of single family homes.
There is a financial term called the “velocity of money.” The quicker money can compound, the quicker it will grow. The speed and efficiency of putting capital to work is unmatched in multifamily versus single family. Investing in real estate should be part of the gameplan for high income earners — it's one of the few strategies that offers amazing tax benefits alongside solid returns. The question becomes what makes more sense for your personal situation.