Are you a rental property investor looking to make your first property purchase? You may be wondering what is wiser: to invest in a single-family home or a multi-family rental property. There are definite benefits and drawbacks to each, and each scenario presents unique challenges and opportunities for your portfolio and pockets. Here we explore the pros and cons to single versus multi-family rental properties so you can make the smartest decision for your investments.
Single-Family Home Pros and Multi-Family Home Cons
1. The cost to get started with single-family homes is lower.
For the first-time real estate investor, single-family homes require less upfront capital investment than multi-family homes. If you are going to buy from a lender that requires a down payment, your initial payment will be less than what you’d need to put down with a multi-family property. Generally, single-family homes are smaller, occupy less square footage, and they are more prevalent in certain areas.
Entry costs are higher with multi-family homes, and commercial real estate loans typically command higher interest rates compared to loans for single-family units.
2. Growing popularity.
A U.S. Census report estimated that the number of single-family rentals in the U.S. grew by 31 percent from 2007 through 2016. Multi-family rentals grew by just 14 percent. Many theorize that this trend was a result of the housing crisis. Regardless of the reason, the growing demand for single-family units indicates more opportunity for real estate investors. Now, the millennial generation is beginning to create family units, and the desire for single-family homes will only increase. Investors putting money into single-family homes today will see continued demand for their properties.
Additionally, because single-family homes are in higher demand, they are easier to sell than multi-family units.
3. Management challenges.
There are fewer twists and turns for single-family home investors. With one tenant or group of tenants in a unit, the property requires less management. In a multi-family property, you need to find multiple tenants which automatically requires more time and energy.
You also may be required to manage the utilities of all the units in a multi-family scenario depending on the structure of your property. If the multi-family home does not have utilities divided among all the units, you will have to provide that service. If you do decide to invest in multi-family properties, look for ones that contain units that have their own utility meters.
Single-Family Home Cons and Multi-Family Home Pros
Rental income will be higher for multi-family properties because the rentals include more housing units. More people renting more units means more income. Many investors weigh the higher initial capital investments required for multi-family homes as worth the end result – higher return.
With a single-family property, you are at risk for zero income should the tenants leave the home. You will have to cover the fees and mortgage payments while doing the work to find new tenants. Without cash flow, you are out of pocket until a new tenant comes along.
Multi-family homes ensure lower risk when tenants leave units. Even if you have a vacant unit, you are not entirely out of pocket until you find replacement tenants because your other units will likely be occupied.
2. Portfolio expansion.
Buying multi-family properties allows an investor to quickly build out his or her portfolio. In one fell swoop, a multi-family rental adds several – or dozens depending on the property – homes to your portfolio. You will be able to mortgage multiple units at once as opposed to mortgaging individual single-family homes that all require different transactions.
3. Real estate appreciation.
Making repairs on multi-family properties forces real estate appreciation on every unit inside that property at once. If you own single-family homes, those units only appreciate in value one at a time depending on the repairs and upgrades you perform. Your investment in a multi-family property appreciates at a greater rate because all the units in the property appreciate at the same time if you perform repairs on the building. For example, fixing the side of a building on a single-family home just forces appreciation on that one unit. Fixing the side of a building on a multi-family property forces the appreciation for all units affected.
The pros and cons of both rental investment scenarios can be tricky to weigh when deciding where you put your money. But with a solid knowledge of today’s trends, the values of each type of property, and a smart approach to property management, you are well on your way to wise investing.