Which is better, a small multifamily property with one to four units, or a larger property with five units or more? The debate rages on, and there are a couple of key differences worth talking through.
Both options can be strong investments. The right choice often comes down to financing, exit strategy, and how you think about scale.
Exit Strategy
With one to four unit properties, you have a couple of different exit options.
You could sell the property to an owner-occupied buyer who plans to live in one unit and rent out the others. Or you could sell it strictly as an income property to another investor. That flexibility is a real advantage.
With a larger property, your exit is much more defined. You are selling it based on the income of the property. You cannot use owner-occupied loans for investment properties that are five units or more. That means your buyer pool is strictly investors.
That is one key benefit of smaller properties. They give you more ways to exit.
Financing Differences
Financing is another major distinction.
Smaller one to four unit properties are eligible for residential loans. These are typically structured with a 30-year amortization and often have a fixed rate for that entire period. That kind of long-term, stable financing can be very attractive.
Larger multifamily properties, on the other hand, are eligible for multifamily Fannie Mae and Freddie Mac financing. Those loans can also be very competitive and attractive in their own way.
There are pros and cons on both sides. Residential financing offers long-term stability. Agency multifamily financing can offer aggressive rates for larger deals.
Cap Rates and Economies of Scale
Typically, larger investments sell at lower cap rates. The reason is economies of scale.
When you have more units in one location, you have built-in efficiencies. Management, maintenance, and operations can be streamlined. Because of that, buyers are often willing to accept a lower cap rate, which effectively increases the property’s value.
That is why you often hear the phrase, “Go bigger, it’s always better.” The compression in cap rates for larger properties can make them very appealing.
However, smaller one to four unit properties tend to have less competition and more flexible terms. For some investors, especially those starting out, that can be a significant advantage.
Final Thoughts
There are real benefits to both small multifamily and larger five-plus unit properties. Smaller properties offer more flexible exit options and access to residential financing, while larger properties benefit from economies of scale and often trade at lower cap rates.
Many investors we work with appreciate talking through which option best fits their goals, risk tolerance, and long-term plans. If you are looking for investment properties in Pennsylvania or Maryland, reach out to us. We are happy to help you evaluate which path makes the most sense for you.
Video
Prefer to watch instead of read? Check out our recent video on comparing small vs large multifamily investments:
