The people who want to invest in real estate, come across the basic question or say dilemma – Should they invest in Single-Family properties or should they put their money in Multi-Family Properties. The answer to this question is not straightforward as it involves making the right decision about putting your hard-earned money and obviously with a motive of not only earning regular and good returns but also it should be a safe investment. So, before we go into the detail of making the right choice, let’s know what single-family and multi-family properties are.
As the name suggests Single-Family Homes (SFHs) are real estate residential properties that consist of one unit which houses only one family, are built on a single lot, and are not attached to anyone else’s residence. And, Multi-family Homes (abbreviated as MFHs) are the types of real estate residential properties, which consist of two or more units and house more than one family. Generally, a residential unit consisting of more than 5 units are considered as Multi-Family Housing Units/Properties or call them Apartments.
Now, we have learned the basic meaning of the two types of properties, let’s get back to our question on which one’s better to invest in. But, as said earlier, the answer is not straight-forward and several things have to be considered before making a choice.
So, instead of making a direct conclusion, we will discuss the advantages and disadvantages associated with investing in both kinds of properties and based on them, a conclusion or, rather say, a decision can be made which suits one’s requirement as well as capacity.
We will start with the Pros and Cons of the Single-Family Units.
ADVANTAGES OF SINGLE-FAMILY UNITS
- Suitable for Beginners – For individuals who have no experience in real-estate businesses and are thinking of investing in this sector, SFH is the best to start with. Since they are single units, they come with a lower price tag as compared to the MFHs so making them easier to buy. Getting a loan for them from a bank is also easier as you have to pay just a 20% down-payment for being eligible for a loan.
- Easier to Sell – The easier it is to buy, so it is easier to sell – not just because they have comparatively lower price tags and lower barriers to entry but these can be sold to both real estate investors and traditional homebuyers. Single-family homes have a much larger buyer pool than apartment buildings and duplexes.
- Growing Demand – Single-family rentals are the fastest-growing segment of the U.S. housing market. The growth rate is 31% in the decade immediately following the housing crisis (2007 to 2016) and also, during these uncertain times of pandemic, were salary cuts and job losses were widespread phenomena, the demand for SFH only rose.
- Higher Appreciation – Due to such high demand for SFHs, their value appreciation is more than MFHs. The value of single-family homes is based on supply and demand. Whereas, the value of multi-family properties is determined by the condition of the property and the rental income it produces.
- Low Tenant Turnover & High-Quality Tenants – The age bracket of tenants renting SFHs is typically older (between 35 and 64 years old). Many of these renters are families who want to settle in and stay in one place for a longer period. Along with that, one of the reasons people like to rent single-family homes is because they can make it their own home. As such, tenants typically take better care of the property because they consider it their own home.
- You become the Landlord – If you don’t have much experience in managing properties, it is much easier to manage one rental property. A big benefit to managing your rental property is that you don’t require a property manager to do that. Instead of paying a manager, you can pay some percentage, say 10% or 20%, for that job from the rental income. However, you don’t get this advantage with managing an MFH.
DISADVANTAGES OF SINGLE-FAMILY UNITS
- Slower Growth on Your Investment and Lower Monthly Inflow – If you are looking to grow your investment portfolio, SFHs will do that, but not as fast as investing in an MFH do. Also, you will get only one rent check for each of your single property. Because there are fewer tenants in SFHs, usually there’s a lower monthly cash inflow on SFHs.
- Vacancies – Owning a vacant single-family rental property comes with high stakes. Because you won’t have inflow from other tenants (like multi-family) coming in to help make up the difference. You’ll be stuck covering the mortgage until it’s rented out.
- You Can’t Live There Too – While you can be a Landlord, but you can’t live there too because – that’s a Single-Family Unit. Many new investors opt for the house hacking strategy, that is, when you buy a multi-family property, live in one unit, and rent out the other(s). That is not possible if you own an SFH.
- Expensive Managing Fees – If you own multiple SFHs, you need multiple Housing Managers too, as it becomes extremely difficult to manage all of those alone. And now you have multiple Managers, so the managing cost increases automatically which is not the case if you own an MFH and a single Manager manages it.
- Higher Likelihood of Foreclosure – Owning a single-family rental property can be riskier than a multi-family because all of your monthly rental income is dependent on the occupancy of that one property. There isn’t any back up rental income to soften up the blow.
We have seen the Advantages and Disadvantages of investing in a Single-Family Home, let see the Advantages and Disadvantages of Investing in a Multi-Family Home.
ADVANTAGES OF MULTI-FAMILY UNITS
- Easier to Finance – At first sight, it might seem as though securing a loan for a single-family property would be a lot easier than trying to raise money for a million-dollar complex, but the truth is that a multi-family property is more likely to be approved by a bank for a loan than the average home. That’s because a consistent and strong cash flow every month is associated with MFHs. This remains the case even some units are vacant or some occupants pay their rent late.
- Grow Portfolio Faster – A SFH can grow your investment portfolio faster, but mid to large-sized MFHs accelerate growth even faster. For example, investing in a five-unit multi-family property will grow your real estate portfolio five times faster than a single-family home.
- More Monthly Cash Flow – You have more rental units in MFHs so this means you have more income streams than owning SFHs. Even per unit rent is less in an MFH, but when the rent of all the units is added, it will be more than the rent of an SFH.
- Economies of Scale – The major advantage of owning an MFH is that you enjoy economies of scale, which is reduced per-unit cost. Because you need only one Manager to manage the Property, one insurance policy, all your properties are in one location, thus easier to manage. An MFH manager usually charges 4-8% as managing fees per rental unit. Additionally, you’ll be able to negotiate better discounts when you renovate or install new materials in 10 units instead of one. That’s the beauty of economies of scale.
- Easier to Manage – The economies of scale gives you the next advantage – Easier Management. In SFHs, you may need multiple Housing Managers whereas if you own an MFH, you only require one, even considering that there are an equal number of family units. So, it brings the managing cost much lower. Also, it is much easier for you to go for an inspection. Coz, you have to visit one single location.
- Unemotional Property Investment – For investors who buy, manage, and sell big multi-family properties, it’s considered a business or income transaction. They are not emotionally attached to the property, they just see numbers. The buyers and sellers of these big investments are typically sophisticated and experienced, making the entire process quite efficient.
- Less Foreclosure risk – Since there is less occupancy in an MFH and there is a regular significant cash inflow every month, the likelihood of foreclosure is not as high as a single-family rental. And so it is a less risky investment for a lending institution and it can also result in a more competitive interest rate for the landlord.
DISADVANTAGES OF MULTI-FAMILY UNITS
- Most Expensive Upfront – Multi-family properties with five or more units are considered commercial real estate. These are easier to finance, no doubt but, most commercial lenders will ask for a minimum of 30 percent as a down payment. And most of the time, which is millions of dollars, which means a 30 percent down payment would be a substantial amount of money.
- Harder to Sell & Least Liquid – The demand for Multi-Family Housing is less as compared to Single-Family Units, which means there are small numbers of the buyer for such properties. There aren’t a ton of people who – (a) can afford the down payment, and (b) want to take on a large multi-family property. So, these become hard to sell if that’s the need and these are the least liquid assets.
- Not a Beginners’ thing – The involvement of a huge sum of money and a good amount of experience that is needed to manage an MFH unit, makes this a High Risk for Inexperienced Investors – as larger multi-family rentals are a huge investment, so there’s a lot more to lose. This is a high-risk investment if you don’t have much experience in real estate.
So, having learned both the Pros and Cons of Single-Family Houses as well as Multi-Family Housing Units, we can now get on to the answer to our question – which one to buy?
Instead of a straightforward conclusion, we would rather go for the suitability. One should consider the various factors that can be worth considering before making a choice. So, one should consider the following things –
- The budget.
- Down payment, you can afford.
- How much monthly rental income you hope/expect/want to get?
- What demographic are you trying to attract? Coz, Different types of rental properties attract different types of tenants. SFH makes the nicer neighborhood and attracts high-income people but MFHs attract different types of people. MFH mostly doesn’t go unoccupied but an SFH can go due to high rent.
- Will you be the landlord or hire a property manager?
- Are you new to real estate investing or are you looking to grow your portfolio?
- Do you want to keep your rental property long-term or sell it in the shorter-term?
Both single-family and multi-family investments can produce great returns. Bigger multi-family homes with lots of units will increase the size of your returns. On the other hand, single-family homes to buy or rent are in high demand right now and we expect that trend to continue as supply tries to catch up. SFH can be considered the better option for a beginner and one with a lower budget, and on the other hand, for a more experienced one, who has a fair budget and want to diversify his portfolio, MFH may be the right choice. So, the bottom line is that both properties can be great investments, but your strategy should be based on your goals and which markets you are looking to invest in.
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