Buildings vs. Single Family

When it comes to investing in real estate, there are two main options for the average investor: apartment buildings (assuming 5+ units) and single family rentals. Both can be lucrative investments, but they offer different benefits and drawbacks. Let’s explore the value of owning apartment buildings versus single family rentals in the Canadian real estate market, highlighting the differences in cap rates and cashflow. Besides cash flow and cap rates, where are some of the best areas in Canada to invest in apartment buildings for high cashflow.

First, let’s define the two types of investments. Apartment buildings are multi-unit residential buildings that are owned by a single investor or group of investors. That group of investors can you and a friend or even a small syndication group. Single family rentals, on the other hand, are standalone homes that are owned by an investor and rented out to a single tenant or family.

Now, let’s look at the differences in cap rates and cashflow between the two. Cap rate, or capitalization rate, is a measure of the return on an investment property. It is calculated by dividing the net operating income (NOI) by the purchase price of the property. A higher cap rate means a higher return on investment. To be fair, cap rate isn’t the only measure of a great investment property, though many will say it is, or even the only measure. But that’s something we can cover in another post.

According to a report from the Canada Mortgage and Housing Corporation (CMHC), the average cap rate for apartment buildings in Canada was 5.6% in 2019. This is higher than the average cap rate for single family rentals, which was 4.8% in the same year. This indicates that apartment buildings offer a higher return on investment compared to single family rentals.

In terms of cashflow, apartment buildings also tend to offer higher returns. According to the same CMHC report, the average cashflow for apartment buildings in Canada was $5,700 per unit in 2019. This is higher than the average cashflow for single family rentals, which was $3,700 per unit in the same year. This means that apartment buildings tend to generate more income for investors compared to single family rentals.

So, why do apartment buildings offer a higher return on investment and cashflow compared to single family rentals? One reason is economies of scale. With multiple units, an investor can spread the costs of maintenance and management over a larger number of tenants. This can lead to higher profits per unit compared to a single family rental.

Another reason is the risk of vacancy. With a single family rental, an investor is relying on a single tenant to pay the rent. If that tenant moves out, the investor may have to go through the process of finding a new tenant, which can be time-consuming and costly. With an apartment building, the risk of vacancy is spread out over multiple units, reducing the impact of any individual vacancy. To be clear, it also depends on where your investment property is located. Currently I own small scale multi and single family rentals. I’ve never had to wait to rent them and I target renters who I feel will be there for multiple years (sorry students!). But to be fair, this is in a market with 1% vacancy or even less depending on the month. That’s why location is so important.

Of course, there are also drawbacks to owning apartment buildings. One is the cost of acquisition. Apartment buildings tend to be more expensive to purchase than single family rentals, due to the higher number of units. This may make them less accessible to some investors, especially those with a limited budget.

Another drawback is the potential for increased maintenance and management costs. With multiple units, there may be more maintenance and repair work required, and the investor may have to hire a property manager to handle the day-to-day operations of the building. These additional costs can eat into profits.

So, where are the best areas in Canada to invest in apartment buildings for high cashflow? According to the CMHC report, the top performing markets in terms of cashflow in 2019 were Montreal, Ottawa, and Toronto. These cities had average cashflow per unit of $6,700, $6,100, and $6,000 respectively.

Apartment buildings may offer a higher return on investment and cashflow compared to single family rentals in the Canadian real estate market, but both multi-family apartment buildings and single family rentals have their own set of advantages and challenges. Investors should carefully consider their goals and risk tolerance before deciding which option is right for them. By doing their research and choosing the right market, investors can make informed decisions that can lead to long-term success in the real estate market.