Single Family vs Multi Family Investing
Investing in single-family vs. multifamily properties continues to be one of the great debates in the world of real estate investing. While each offers several compelling advantages, each side represents a very different exit strategy for investors, including management style and income earned. Because these properties are viewed differently by investors, insurers and lenders, comprehending the ins and outs of multifamily and single-family properties is critical for success.
Multifamily Investing Benefits
A multifamily property, sometimes referred to as a multi-dwelling unit (MDU), is a type of residential housing with two or more units under one roof or several buildings within one complex. They are generally comprised of many configurations, with the most common examples being duplexes, townhouses, and some types of condos. Each unit tends to have its own living space, a separate kitchen, and bathroom. Although the definition differs from situation to situation, a multifamily property will generally consist of owning a combination of the property and the land on one recorded deed. In some cases, it can be owned by one or more parties.
While they are the least common type of residential buildings, investing in multifamily properties are an immensely favorable strategy among investors thanks to their additional source of monthly income, along with slow but steady appreciation. As an investor, the advantages of owning a multifamily property include:
Higher Cash Flow: If a single-family property generates a single monthly income, why not invest in a multifamily property producing multiple forms of monthly income? While the allure of investing in multifamily properties is easy to see, these investments represent an innovative opportunity to generate additional income from one investment. In addition, investors may decide to live in one unit, and rent out the others for income, also known as house hacking. When it comes to passive income retirement investing, a multifamily property can be used in multiple ways.
More Asset Control: The more income a property receives, the higher the value is. Because multifamily properties are comprised of more units, which means earning multiple streams of income, these types of investments are generally valued higher than single-family homes, which are dependent on comparable sales as rentals. When investing in multifamily real estate you can do what’s called “force appreciation” and add value to the property in some way, typically through renovations, or decrease expenses, and thereby increase your net operating income which then increases the overall value of the asset.
Larger Pool of Tenants: One of the underlying benefits of investing in multifamily properties is less risk. How you ask? Because, unlike single-family units, where income is lost when the home is vacant, multifamily properties have numerous units and alleviate the total economic loss for investors.
Scalability: Multifamily investments epitomize scalability. Rather than purchasing individual properties and slowly growing your business one transaction at a time, these investments represent the opportunity to acquire multiple properties within one building. They are perfect for those looking to grow their real estate investment portfolio and take their business to the next level, with the option for investors to venture into the arena of mixed-use and apartment investing down the road.
In its simplest form, new investors should conceptualize multifamily real estate as a hybrid between a single-family home and a condo where both the structure and the land is owned and on file in one recorded deed. Along with the ability to generate more income than a single-family property, these investments are ideal for those looking to not only grow their business, but offset risks when generating monthly income.
Single Family Investing Benefits
A single-family property, otherwise referred to as a single-family home (SFH), is defined as a free-standing residential dwelling built on a single lot with no shared walls. Unlike a multi-family home, these properties contain only one unit which is neither attached or built in unison with any other type of structure. In addition, a single-family home will generally include a front and backyard, as well as a garage.
Traditionally used for owner occupancy, single-family homes can also be used as an investment vehicle to generate monthly income. With record-low mortgage rates and fast-rising rental rates, these investment properties offer an assortment of advantages compared to multifamily real estate, especially for beginner investors. The following examines the benefits of investing in single-family properties:
Affordability: One of the more obvious advantages of investing in a single-family property is cost. The price for these real estate investments is generally much lower than multifamily properties, including additional expenses such a down payment and maintenance. Rather than 25-30 percent down, which would be the case for a multifamily home, investors simply need to ante up 10-15 percent for the down payment. Sometimes as low as even 3% or 0% if owner financing. In addition, most rental agreements will require the tenant to pay for the majority of utilities, as well as take responsibility for the landscaping, which makes long-term maintenance costs much cheaper. Also, insurance rates will be more affordable for single-family homes than multifamily properties.
Appreciation: For one reason or another, single-family investments tend to appreciate more than other types of properties. It could be a variety of factors, but it mostly pertains to how lenders value each type of investment. Unlike multifamily properties, which are valued on the rents coming in and the condition of property, single-family homes are valued on supply and demand of owner-occupied buyers. If well-maintained and situated in a thriving neighborhood, buyers will always be in demand for single-family properties.
Easier to Finance: Although financing guidelines and rules vary from bank to lender, financing a single-family property is typically much easier than its multifamily counterpart. Lower interest rates and higher loan-to-value (LTV) ratios are one of the main benefits of financing single-family homes. And because these properties are typically much more affordable than multifamily homes, many investors will forgo financing options and purchase the property with cash. It’s important to note that financing a property for the intentions of rental income (non-owner occupied) will subject borrowers to different mortgage rates than an owner-occupied loan. Investors can expect to pay 0.25 – 0.50 percent more than owner-occupied mortgage rates.
Easier to Manage: Managing one unit over four has its appeal. The one aspect many investors fail to consider when investing in real estate is the cost of managing it, which can vary depending on the number of units. With only one tenant, single-family rentals are much easier to manage. Investors can choose from becoming the landlord and managing the property themselves or hiring a professional management company to oversee the investment.
All-in-all, real estate as a whole is an excellent investment vehicle used to catapult you towards your financial goals. Whether you choose single-family or multifamily, is entirely up to you, and should be a decision not taken lightly. I will always encourage more education if you still aren’t sure on something. Please, don’t hesitate to contact us if you have any questions regarding investing into real estate. To your success!