Today’s guest blog was written by TJ Lokboj from SyndicationPro, a company that develops real estate syndication software. Tj has a wide range of experience in entrepreneurship, real estate investing, and technology.
Investing in the real estate industry keeps popping up every time you read about investing your hard-earned money for retirement or simply generating passive income. Now you’ve gone past the question of what, and you’re starting to ask how.
When it comes to investing in residential real estate, one common question keeps coming up from newbie and experienced investors alike. Should you invest in single-family or multifamily property?
If you’re entirely new in this field, single-family investing essentially involves buying into conventional and freestanding homes that are built for single households or one family. You might fix and flip the property for a quick burst of income or rent it out to tenants to generate steady monthly cash flow while the asset appreciates over the long term.
On the other hand, multifamily properties are typically small properties such as duplexes (2 units), triplexes (3 units), or quadplexes (4 units), or large properties such as apartment buildings. Primarily, multifamily properties are properties you invest in to rent out and hold longer term.
Now that you understand the basic differences between the two, you might want to drill down even further and clearly outline the disparities between the two. It’s important that you gain deep insight into the two before you invest in any.
Are you at a crossroads as you consider the best option for you? We have done all the hard work and come up with this comprehensive guide. Here’s what you’ll need to know about each option.
Investing in Single-Family Property: Pros
Single-family units generally have lower costs compared to their multifamily counterparts. One reason is because the cost of insuring and maintaining multifamily properties is higher.
Additionally, with single-family properties, you’ll have easier access to financing. You’ll also need to place a smaller down payment.
There’s also more inventory to choose from, and they’re generally cheaper. Single-family units might be the best option for beginners or investors working with a limited budget.
Attract More Tenants
Single-family units can be more attractive to tenants depending on the market.
For example, say you’re in a suburban market where potential tenants prefer a balance between being close to the jobs and amenities of the city, while at the same time living in a more comfortably sized home in a less densely packed area.
In this case, your single-family units will tend to attract more interested candidates as they’ll provide just what the tenants are looking for.
Ample yard space, garage parking, and larger square footage can make the property even more attractive.
Favorable Resale Conditions
Another benefit of single-family investing is that there’s a lot more potential buyers compared to multifamily properties. You can get great returns on your units once you’re ready to sell since the demand for single-family property is always high.
With single-family properties there’s always a large pool of potential buyers. Therefore, you can expect to sell your property faster and at a good profit.
Investing in Single-Family Property: Cons
Once you become a landlord to single-family properties, vacancies will hit you much harder. Why?
Single-family units are standalone properties. You can only have one tenant at a time. If your tenant leaves, your income goes down to nothing. Even just a few months of vacancy could be lethal to your real estate business.
This could make it even tougher if you’re still repaying your mortgage or you’re not in a good financial situation.
Lower Cash Flow
If you’re looking for a real estate investment with higher cash flow, single-family properties may not be your most suitable option.
Fewer units mean less income. With only one unit, you’ll be depending on a single source of cash flow. Now imagine if a huge chunk of that income goes to maintenance, mortgage repayment, and other administration fees.
Here’s a recap of pros and cons of investing in single-family properties:
|– Lower Costs
– Attract more clients
– Favorable resale conditions
|– Tougher vacancies
– Lower cash flow
Investing in Multifamily Property: Pros
Higher Cash Flow
Multifamily properties basically mean more units. More units mean more tenants. This means you’ll likely have a higher cash flow because you have more than one income source every month.
This provides more income even when you experience inconveniences. If a tenant delays their rental payment, you aren’t completely without an income. If a unit remains vacant for a while, the income from the other units will help to keep you going until you get a new tenant.
Some investors move into one unit once they’ve purchased a multifamily property. This is smart as the income from your tenants helps pay off your mortgage and perhaps some other living expenses. This could be a great option if it fits your investment goals.
Economies of Scale
Investors who go for multifamily properties get to enjoy some considerable economies of scale. This can be especially beneficial when it comes to repairs and maintenance.
If you need major repairs done to your property, you’ll be able to negotiate more favorable terms and rates with contractors and service providers. This applies to any form of service you may need.
Let’s say you need major repairs in your pipes, drainage system, or electrical system. You might get pretty good discounts on your property.
If you want to save more money, you can get work done on more than one unit at the same time. This will cut down mileage and trip fees that contractors might charge.
Access to Commercial Mortgage Financing
Many investors tend to think that multifamily property may not enjoy as many financing benefits as single-family properties. They are wrong.
Large multifamily properties of 5 units or more give you, as an investor, easier access to commercial mortgages. With single-family and small multifamily properties, it’s easier to access traditional mortgages and some types of investment loans.
Your accessibility to the financing will depend on a few factors, such as:
- How much down payment you wish to make
- Your credit score and history
- Other assets that you own
- The institution where you’re going to finance the purchase.
Many investors will tell you they had an easier time going through the lending process when buying multifamily properties. The amount of revenue you expect to generate can also help you negotiate more suitable terms.
Investing in Multifamily Property: Cons
Compared to single-family properties, multifamily units tend to appreciate at a lower rate. This is simply because there’s fewer buyers for this kind of property. Single-family properties have more buyers and higher demand, which drives prices higher.
This means that single-family properties are also easier to sell. The opposite is true for multifamily units. Getting rid of multifamily units is harder and so they typically sit on the market longer. This is something you should definitely consider.
While multifamily units bring in more revenue, they’re simply not for everyone. Why?
Multifamily properties are more demanding. Maintaining them takes a lot of time and effort, and this might not be everyone’s cup of tea. They might even alter your lifestyle.
Let’s say you want to invest in multifamily units so that you can rent them out. Unless you hire a property management company, which would be yet another expense, you’ll be solely responsible for tenant screening, coming up with the lease agreement, scheduling repairs and maintenance, and many other responsibilities.
Being a landlord is time-consuming and quite difficult. Make sure you consider the amount of commitment involved before you invest.
Tenant quality is a common concern for multifamily properties. If your property is located in a densely packed lower-income neighborhood, you may end up with less affluent tenants.
The reason why this may be a risk is that you may have more vacancies and tenant issues compared to single-family renters.
In a nutshell, here’s a summary of the advantages and disadvantages that come with investing in a multifamily property:
|– Higher cash flow
– Economies of scale
– Access to commercial mortgage financing
|– Less appreciation
– More responsibility
– Tenant quality
Which One Should You Invest In?
As you’ve already seen, there are many pros and cons associated with each option. Eventually, you’ll have to weigh them all and choose the one that more aligns with your goals.
If you have the financial muscle and financing is not an issue for you, you can go for both at the same time.
As a newbie investor, single-family properties could be your best bet. They have lower risks, and you’ll get to learn the ropes as you earn an income. Besides, it’s easier to exit if things don’t go as expected.
When considering whether to invest in single-family properties or multifamily units, the most important thing is to surround yourself with smart people who have great experience in investing and can help guide you along the way.
Remember there’s always money to be made in either investment options, or a combination of both. Define your investment goals clearly and make intentional and strategic decisions that will slowly propel you towards your goals.
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