Whether you are looking for your first property or your tenth, the decision to purchase includes the actual living quarters and structure of the property. This means you will need to consider whether you should invest in a single-family home or in a multi-family unit that holds multiple tenants.
While there is no “right” one size fits all answer, there are some factors that can help you decide if one type of rental unit is better for your investment. Learning more about the differences between single-family and multi-family rental properties can help you determine which of these options suits your needs best. Both properties have significant advantages and a few drawbacks too; the factors that matter most to you should be considered carefully before you invest. Consider the following details before choosing your next investment property.
A single-family property means a sole unit (a detached home, single condo, or town home) that is occupied by one tenant or a single-family. Some of the things to consider when you look at this property type are detailed below:
No Tenant vs. Tenant Nightmares: Your tenants are a sole individual or a family; any conflict that they have will be internal. There are no other tenants to feud with and no complaints to you about the guy with the loud music or the lady with the huge dog.
Lower Maintenance: In general, single-family homes require less maintenance on your part, particularly if you have screened your tenant well. Apartments often need more work between tenants, and it is possible to end up with multiple repairs or turnovers at the same time.
Easy to Diversify: When you own several properties in different neighborhoods, the problems from one won’t spill over into another. Several properties in the same building can be impacted by anything from flooding to changes in school district lines and even a leaky roof. If prices begin to fall, having diversified properties offers some protection for your overall portfolio.
Liquid Assets: If you need capital for another project, shift your focus, or simply want to move on to bigger investments, the liquidity of a single home makes it easy to do so. Single homes traditionally sell more swiftly than multi-units, so if you need more liquidity in your portfolio, this property type can help.
This category includes structures that house more than a single tenant or family at a time (like apartment buildings). Here are a few things to expect if you purchase a multi-family property:
Easy Property Management: Since all units are in the same place, you can manage the facility more efficiently. In some cases, you can even have a property manager right on-premise or in the area to keep order, show units, and manage contractors.
Save By Buying in Bulk: If you need to have painting done, appliances switched out, or even need to complete a major repair like a new roof, you can save by buying in bulk. You’ll usually spend less money refurbishing a unit in a multi-family dwelling than you would on a single home.
Increased Cash Flow: If your single-tenant misses the rent, then you’re out of luck, at least for a little while. Even though you have actions available to you, they take time. When you have a multi-family rental, you have several tenants paying rent instead of just one—so a single bad tenant won’t throw your finances off.
After going through the details of each property above, you may start to lean one way or the other in terms of the type of property you’d like to purchase. However, there are other items to consider as well; let’s take a look at a few:
Single-Family vs. Multi-Family Rentals: How Much Money Can You Make?
The actual amount of rent your market will bear depends on your property, the area it is in, and the going rate for the type of home you have. In general, though, a multi-family property will generate more rent, simply because more tenants are paying at the same time.
While a single-family home may generate more rent than a single apartment, a multi-family property has more than one unit. As long as more than one unit is rented out, most multi-family properties will generate more income in total than single-family homes.
With a single-family home, you also take on more financial risk in the short term. If the home is unexpectedly vacated or the tenant can’t pay the rent, you will have no source of income. If the same situation were to occur in one of your apartments, it could be offset, because the other tenants will not have the same problem at the same time. Therefore, when you opt for a multi-family property, you have far less risk of negative cash flow.
Single-Family vs. Multi-Family Rentals: Property Financing Differences
The cost of a single home or a multi-family property will depend on the property itself and where you live. But single homes are almost always less expensive than their larger counterparts. When it comes to financing—especially if you’re just starting out as an investor—a single-family home will be easier to manage and have more financing options available.
A multi-family unit may be slightly out of reach for a new investor, simply because of the overall cost. The actual financing terms will vary, but a residential real estate loan can still be used for a multi-family property of four or fewer units. Buildings with five or more units will require commercial lending instead.
Commercial real estate loans can be more involved than residential mortgages, simply because your lender will want to scrutinize your record, your history of property management, and more. In some cases, you’ll also need to come up with a higher percentage of the selling price as a downpayment.
Single-Family vs. Multi-Family Rentals: Home Appreciation
Both of these property types can (and hopefully will) appreciate over time. While appreciation can occur in each, repairs to a multi-family property can impact more units collectively. Replace a roof on a single home, and you’ve forced appreciation on one home. Replace the roof on an apartment building with eight units, and you’ve appreciated the value of each.
Single-Family vs. Multi-Family Rentals: Rental Property Management
Single-family homes (provided you select tenants with care) require less work and attention than multi-family units because there are fewer people on the property. Conflicts between tenants can disrupt your schedule and can even lead to property damage if a tenant feud escalates. If you have plenty of time to manage your rentals or you can afford to invest in a property manager, differences in management needs won’t matter. But if you are taking the DIY approach, you may end up spending far more time at that multi-family unit than at the single home.
Single-Family vs. Multi-Family Rentals: Exit Strategies
Just as the buying process is more flexible and efficient when purchasing a single-family home, the selling process is also streamlined. Single-family homes can be liquified more easily and can be sold to other investors or buyers who want to live in the home.
The multi-family property may take a little longer to sell; it will need to sell to another investor who will have to get a commercial loan, just as you did when you made your initial investment. Because of this, the prospective buying pool may be smaller than the potential market for a single-family home.
Which is Best? It Depends on You.
Looking at the unique features and advantages of each type of property and comparing important factors like cash flow, liquidity, property management, and upkeep can provide you with valuable insights. These details can help you determine if one property type is better for you at this point in your investing career. Once you know the differences, you can make an informed, data-based decision that will help ensure success.