Discoverability: With other users on the instance the federated timeline is populated by posts from users that others on your instance follow, so you have to follow people a bit more liberally to discover other posts.
Community: Instances also have a local timeline, which shows posts from others on the instance and this gives each one a slightly different vibe. With a single-user instance it's just your posts!
But either way, you can still interact with pretty much anybody else in the Fediverse, and once you're followed by a couple of people your posts will go out to the federated timelines of other instances and you'll get interactions via that.
The downsides are the usual sysadmin stuff that comes with running servers for anything. People also get excited about the instance-local timelines on multi-user instances, but again, that's completely missing the point.