Investment properties can be an excellent source of passive income for many people. Residential rental properties are a popular investment for people new to real estate investing. These kinds of properties are either single-family units or multi-family units. There are pros and cons of each type of investment, and today we’re sharing some of our experiences with single and multi-family investing.
Many new real estate investors start with a single-family unit and then gradually move to multi-family properties. From a learning curve standpoint, this makes sense, as it’s easier to get the hang of landlord-tenant relationships when you’re just focused on one property.
Advantages of Single-Family Rental Properties
Before you make your first rental property purchase, there are a few things to keep in mind. It’s easier to finance a single-family house than a multi-family unit, as most mortgages can typically be secured with just a 10-20% down payment. These loans usually have lower interest rates, and it’s often easier to get approval for the loan. Maintenance and insurance costs are generally lower for these homes, as well.
Higher Quality Tenants
Many single-family home tenants tend to treat their home as if they owned it themselves. Renters are typically families who are less likely to damage the property and will treat it with care. These families also tend to stay in the units longer, meaning a lower turnover rate. Single-family renters tend to fall in an older demographic, too, between 35 to 64 years old.
Your single-family home tenants will likely be more stable and responsible, with longer occupancies, on average.
Higher Resale Demand
If you decide real estate investment isn’t for you and it’s time to sell the property, you’ll have a larger buyer pool than if you were selling a multi-family house. Multi-family property buyers are typically just other investors, while buyers for a single-family home can be either investors or other families who wish to buy the home.
You’ll have an easier time selling the property when your buying pool is so much larger.
Disadvantages of Single-Family Property Ownership
While tenant stability is a significant benefit of single-family home investment, there are financial considerations that are generally disadvantages of owning this kind of investment property.
Impact of Vacancies
When a tenant moves out, your single-family property isn’t generating income. You, however, still have a mortgage to pay on that property, which is why we encourage investors to have at least six months’ cash reserves for each single-family house.
However, when someone moves out of one multi-family unit, say a triplex, you still have two other tenants generating your income.
Lower Monthly Income
With multi-family properties, you can scale your investment. However, if you’re building your real estate portfolio with single-family homes, it takes a lot longer to achieve than what you’ll generate with one multi-family home.
Lesser Valuation Control
Multi-family homes are valued based on the income they produce, while single-family homes are valued on comparable sales – that is, the sale prices of similar homes in the area. Therefore, the owner has less control to increase the perceived values.
Multi-family property owners can adjust the rent according to the amenities provided. For example, a community pool, free internet, or laundry services allow a landlord to demand a higher rent and therefore increase the total income produced by that property.
Multi-Family Investing Advantages
Real estate investors who want to quickly build a robust investment portfolio tend to focus on multi-family construction over multiple single-family homes. Holding mortgages on ten multi-family properties can produce significantly higher returns than holding ten mortgages for single-family homes.
Why is the number of mortgages so important?
Maximize Your Mortgage Opportunities
Opting for multi-family property mortgages allows investors to leverage multiple mortgages simultaneously. Many new real estate investors may not know that two of the largest government-backed mortgage lenders, Freddie Mac and Fannie Mae, limit the number of mortgages you can have – a cap of 10 at any one time.
Most mortgage companies also comply with these guidelines.
Multi-family home with four units doesn’t count as four mortgages – just one for the entire property. Therefore, if you purchase 10 of these units, you’re actually holding 10 mortgages for 40 units.
It’s important to note that this cap only affects how many mortgages you can hold at one time, not how many properties you can own for lease. If you’re able to pay off your mortgages, you open up space for an additional one. Investors may look into portfolio loans or take out private money loans to continue building their holdings.
Lower Cost Per Unit
While the price per unit is lower than a single-family home, the cost per unit for a multi-family property is also lower. The initial outlay for the multi-family home is more, but compared to the unit cost of single-family properties in the area, multi-family properties are less per family unit.
Bigger Cash Flow
Multi-family units offer investors a safety net – when one unit is in between tenants, the rental income coming in from the other tenants will cover the shortfall without you having to dip into your reserve cash. Multi-family construction also has a higher return on investment than single-family homes.
Disadvantages of Investing in Multi-Family Properties
We’ve talked about the stability and general overall quality of single-family home renters already. By comparison, the tenant pool for multi-family properties may not be as desirable and may be more transient than single-family renters. People who opt for multi-family rentals may view living in the place as temporary and therefore not care for it as much. These properties may be located in less affluent areas, and therefore your tenants may be more financially unstable.
With more tenants to manage, there may be more problems to arise, which drives a need for a greater degree of property management.
Single Utility Meters
Some multi-family units may have separate utility meters for each unit, which means that the tenants pay for their own electric, water, trash, and snow removal. Others may have just one meter for the entire property.
One utility meter for the property means that you, the property owner, have to pay for all the utilities. These costs may improve the perception of value for potential tenants, but you’ll have to factor them into your rent prices.
More Difficult To Sell
The main buyer pool for multi-family properties is other investors. Sales aren’t as competitive, and therefore it may take longer for you to find a buyer. Plus, these properties don’t appreciate as much as single-family homes.
Economy Of Scale
Looking at the cost per unit for multi-family homes, an economy of scale can be an advantage or a disadvantage. While the overall cost for certain things may be higher for a multi-family unit, the price per unit is less.
Upgrades and general maintenance can be cheaper per unit for multi-family homes than doing the same roof replacement or interior rehab for each single-family home. You may be able to negotiate more when booking service for all units of property simultaneously than you could book for several separate houses.
Whether you choose to invest in multi-family or single-family construction, understanding the cost advantages and disadvantages is important. Whichever type of investment properties you choose may be contingent on your goals, your financial wherewithal, and even which part of the country you live in. Choose the option that works best for you and your financial portfolio.