Single-family home vs multi-family home

When it comes to buying a home, you’re probably thinking about the neighborhood, the number of bedrooms, how tasteful the finishes are and whether or not the price makes sense to you.

But there’s something more fundamental to consider: Whether you want an actual detached residence, or a set of rooms within a larger building. Or, as the real estate pros say, a single-family or a multi-family home.

While the freestanding house fits in more with the American Dream, apartments have advantages too. From design to zoning to financing, here’s a rundown of what the major differences are between a single family home and a multi-family home.

What is a single-family home?

A single-family home is a freestanding residential unit that is designed and built for one family. To be considered a single-family home, the property should also be an individually owned lot or parcel separate from other dwellings in the area.

This is true even if the underlying land is fractional. Take a townhouse, for example. Even though it may be attached to other dwellings, it is built on its own section of property, according to the United States Census Bureau. This is reflected in the title of the property, which denotes when a piece of real estate has land attached or not.

There are many different types and styles of single-family homes, including:

• Ranch
• Split-level
• Manufactured
• Bungalow
• Twin home
• Townhouse

What is a multi-family home?

A multi-family home is a residential dwelling that includes more than one living unit. The difference between the multiple units is defined by each having a separate entrance, living facilities (kitchen, bathroom) and utilities. Each has its own address.

Multi-family properties allow each inhabitant to live a separate life. They’re not dependent on the other to set the temperature on the heating unit, nor will they share a utility bill. The different dwellings can be stacked on top of or to the side of one another. However, they share interior walls, ceilings and floors.

Multi-family housing also typically has common facilities, such as a basement, an attic, elevators or stairs, or a garage. They may also have common amenities like outdoor spaces, a pool, fitness facility, or playground.

There are many different types of multi-family properties, including:

• Duplexes, triplexes and fourplexes
• Apartment complexes
• Condos
• Co-ops
• Age-restricted property (think 55+ communities)
• Assisted living centers
• Rowhouses (characterized by shared walls running from the base to the roof of each dwelling)

Single-family vs multi-family homes: key differences

While the main difference between a single family and a multi-family home is families are legally allowed to live there (obviously), there are some other distinguishing factors.

Separation of living facilities: In a single-family home, all the systems that run the home are  independent and autonomous from other homes nearby. A multi-family home has separate utility meters, entrances, and plumbing and HVAC fixtures and outlets for each of the units, but the units all make use of the same systems and facilities (furnace, water tank, etc.) Communal areas for multi-family property are common.

Legal distinctions: Single-family homes are considered residential real estate. Multi-family homes can be considered residential or commercial real estate: Smaller multi-family homes are those with four or fewer units and are considered residential property; commercial multi-family property has five or more units.  The definition can be significant for several reasons, including zoning and financing(see below).

Zoning regulations: Through their zoning laws, cities may restrict where commercial properties in general, and multi-family properties in particular, can be built. Single-family home zoning may also be restrictive, especially if you want to use the home as a short-term rental or build an ADU (accessory dwelling unit) on your land. Some municipalities have banned short-term rentals or ADUs altogether.

Financing: Financing is different for multi-family homes depending on how many units there are. A conventional loan can be used when investing in a property with four or fewer units, whether it’s a single-family or multi-family home. In a multi-family property with more than four units, a commercial loan must be utilized. Commercial mortgages have different terms than residential mortgages do.

For lending purposes, a property that has between one and four units can be financed as a single-family home. If one of the units is lived in by the owner, it can also be financed as an owner-occupied single-family home, which can grant borrowers very favorable terms and interest rates.

Loan limits: Single-family properties that are financed with a conforming loan are subject to the 2022 federal limit of $647,200 in most areas and $970,800 in high-cost areas. A mortgage for more than this amount would require a jumbo loan or a piggyback mortgage.

Financing for multi-family properties is evaluated on a case-by-case basis with amounts ranging from $1 million to $1 billion. Often, the mortgage terms are based not so much on the value of the property itself, as is the case with single-family houses, but on the rental income generated by the tenants living in the building.

Investing in a single-family or multi-family home

Both single- and multi-family homes can function as investment properties. In fact, multi-family dwellings usually do function as investments — a source of income and property appreciation — for their owners, even if they live on-site in a unit as well.

When it comes to deciding which to invest in, Nest Seekers International Real Estate Advisor and Chief Economist Erin Sykes says, “Depending on size, [a] multi-family may be better for a more experienced investor. If there are multiple tenants, you would need experience in managing those relationships, collections, maintenance of the property and turnover.”

“I’d say leave multi-family to the pros,” agrees Todd Watkins, co-founder of RailField Partners, a multi-family property investor and asset manager headquartered in Bethesda, Maryland. “It is a full-time job, and when you have more at stake you probably don’t want to start with something big. People who are handy and can do repairs and maintenance on their own may be more able to handle it.”

In contrast, renting out single-family homes can be simpler — especially if it’s a part-time arrangement or vacation-home sort of situation. Sykes says, “Single-family home investment is ideal for a location where there is seasonality and thus a strong rental market (think Palm Beach, the Hamptons, Jersey Shore). Thus, you can charge a premium for the shore rental season and then live in the property during the extended off season.”

“The important thing investors should also consider is the location of the property when deciding whether to buy multi-family or single-family real estate,” says Alex Shekhtman, CEO and founder of LBC Mortgage, a Los Angeles-based mortgage brokerage.

“Properties in high-density areas are more likely to be suitable for multi-family development, as there will be greater demand for rental units. However, properties in lower-density areas may be better suited for single-family development, as there is likely to be less competition from other investors. Ultimately, the decision of whether to buy multi-family or single family real estate depends on a variety of factors and should be based on the individual investor’s goals and objectives.”

Single-family vs multi-family homes: pros and cons

Single-family home

Multi-family home

Final word on single-family vs multi-family homes

A single-family home is the quintessential American Dream House, complete with a big yard and lots of rooms. But other folks — especially singles, childless couples and empty nesters — might prefer multi-family home life and its communal set-up.

When it comes to investing, a large multi-family property costs more upfront to purchase and maintain, but the potential for cash flow and property appreciation is also much greater. By purchasing real estate with more than one unit, there’s a strong possibility that the rental side of the multi-family home can help or completely cover the costs of the mortgage. A multi-family property can also serve two purposes: as a residence for the owner (and/or other relatives), as well as a business.

Ultimately, deciding between the two different property classes is a matter of what your goals are and what makes the most sense for you, your lifestyle and your finances.