There a few reasons that some people suggest investing with multi-family rental properties. One reason is that you can potentially get more rental income per property than if that property were a single family home. There are potential cost savings, but I didn’t see the cost savings to be that significant at the residential scale multi-family properties I usually invest in. Note that when you go into 5 units or more, you have to get into commercial financing and insurance which are significantly more expensive than residential options. The biggest advantage for me is to build out a portfolio of rental units. You can manage the risk on that portfolio much like an insurance company handles risk pools.
For an insurance company, the risk they are managing is an individual filing a claim. They spread the risk over a diversified pool of individuals and make money based on the fact that there is a very low probability that a large number of people will file a claim at the same time. As a landlord, my risk is when a tenant does not pay rent or I cannot fill my unit with a paying tenant, and that may be the tip of the iceberg in terms of risk.
When you manage a portfolio of properties, you can do a few things to manage the risk. One is to get a nice mix of units, geographic distribution, and target markets. Much like an insurance company would prefer a larger group of healthy people vs. unhealthy people when they offer health insurance, a landlord would prefer tenants that have good credit scores, a good rental history, a steady income, etc… You also reduce your headaches by looking at neighborhoods that score well with the type of tenants you want to secure. After doing all you can to manage risks, you will still have situations where you have units not generating income. During those times, you expect that the non-performing units will be only a small portion of your overall cash flow.
In my experience, the property portfolio approach to pooling risk has worked out well. Even in the face of COVID, I am lucky to have virtually no non-performing units. We seem to be turning the corner on COVID, and I do worry about a situation where all of my units become non-performing at the same time. Similar to an insurance company, I would be in a bit of trouble if that were to happen. I do run stress tests on the portfolio, but the “worst case” scenario is something I hope we never have to experience.