If you're looking to actively invest in real estate, you have two major options: single-family or multifamily. With single-family, you'd be buying traditional homes built for one family or household. That might entail fixing and flipping the properties or renting them out to short- or long-term tenants. On the multifamily side, we're talking apartment buildings, condo communities, or, on the smaller scale, duplexes and triplexes -- typically properties you'd hold and rent out.
But those are just the basic differences. When you really drill down, there are a lot more disparities between the two investing strategies -- and it's important you consider them all before deciding which route is best for you.
Not sure whether you should try your hand at a single-family or multifamily investment first? Here's what you need to know about each one.
Single-family investing: The good
There are a lot of benefits to starting off with single-family homes. It's the more affordable option, it's easier to finance, and you can be pickier about your tenants. Let's break down the benefits below.
It's easier (and cheaper) to get into
With single-family real estate, there's simply more inventory to choose from. Properties are cheaper, too, so you'll need less capital to get started -- even if paying in all cash.
You can be choosy about your renters
Since you only have one unit to fill, you can afford to be a little pickier about who you let rent it. In a multifamily property, you might have to fill dozens or even hundreds of units at any time. That usually means adopting looser qualifying standards in order to avoid vacancies.
There's less turnover and fewer vacancies
Multifamily properties have vacancies constantly, and there's always a tenant moving in or moving out. This requires a lot more work on your part, and it also means more potential losses if you can't fill those spots. With single-family rentals (SFRs), you only have a single tenant to worry about -- and turnover is only every 12 months at the least. It means less time spent finding new tenants and less work turning over the property.
It's easier to sell later on
There's always demand for single-family properties, so if you're not making the returns you want or you just want to get out of the SFR game, selling the home will likely be quick and easy. This isn't the case with multifamily properties.
It's usually easier to finance
Financing a single-family home is typically a lot easier than doing so for a multifamily one. First off, you need less money. On top of this, underwriting standards are usually looser on a residential mortgage than a commercial loan. You won't need to prove your investing prowess or make a massive down payment, and you'll probably have an overall easier time getting a mortgage.
There's less maintenance
This one's easy: a single-family property is almost always going to require less upkeep and maintenance than one with dozens of units and tenants. That means less in maintenance costs, too.
Single-family investing: The bad
Cash flow isn't as strong -- unless you own several properties
Fewer units means less cash, generally speaking. You're only getting a handful of rent payments per month, and a large chunk of those are going toward your mortgage, maintenance costs, and admin fees. With multifamily rentals, you simply have a lot more money flowing in.
Vacancies are more expensive
A lot more rides on filling those vacancies when you only have one or two units. In many cases, even just a few months without rent payments can be seriously detrimental to your business. It might mean falling behind on your mortgage or, worst-case scenario, having to sell the home to keep above water.
It's harder to scale
If you're looking to build a big real estate portfolio, it's a lot more work with single-family properties. A portfolio of 10 units would mean 10 negotiations, 10 mortgage applications, and 10 closings, and it would probably take a good amount of time. Multifamily properties let you scale up with just one purchase.
Returns are down
According to ATTOM Data's recent single-family rental report, returns are down on single-family rentals in more than half of the country's major counties. If you do opt for a single-family rental property, make sure you choose your location carefully. The report finds that Baltimore County, Maryland, and Cumberland County, New Jersey, have the highest potential gross returns.
Single-family investing pros and cons
|Easier and cheaper to get started. You can be pickier about tenants. Less turnover. Fewer vacancies. Easier to sell the property. Financing is typically simpler. Less maintenance and upkeep.||Less cash flow. Vacancies are costlier. It's harder to scale. Returns are down.|
Multifamily investing: The good
If you're the go-big-or-go-home sort, diving into the multifamily housing world may be a better fit. You'll get an instant portfolio of many rental units, and you'll enjoy the cash flow to match. Just remember: These properties come with added work, too.
You'll have lower per-unit costs
It's always cheaper to buy in bulk, and rental properties are no different. You'll typically pay a much smaller price tag per unit when you buy a multifamily home versus a single, one-unit home.
You can expand your portfolio faster
Buying a multifamily home means an instant real estate portfolio. You'll have at least several units on your hands, and you'll enjoy the cash flow and profits that come with it.
You have better cash flow and a bigger financial cushion
The extra cash that comes with multifamily real estate can help safeguard you from loss. There's more room for error, and you may have more capital to further grow your investing business if you do it right.
The property value may appreciate faster
With a multifamily property you can force appreciation across your units if, for example, you update the building's roof or a common area. It increases the value of all the units, not just one. This is a distinct advantage over a strictly single-family portfolio.
Multifamily investing: The bad
You can't be as picky with tenants
When you have dozens of units to fill, you can't afford to turn away many tenants. Keeping those rentals occupied is critical to keeping that cash flow healthy, so you may need to be a bit more lenient on who you rent to.
You might have a harder time with financing
If you're buying a large multifamily property, you'll need a commercial mortgage loan, which is usually harder to qualify for than a traditional mortgage. You also might need a bigger down payment, more in cash reserves, and a proven track record in real estate investing and property management.
You'll probably need to lean on other people more
You might be able to DIY the maintenance and repairs tasks on a single unit (or maybe two or three), but with a true multifamily property? You'll probably need to bring in the big guns. If you have more than a handful of units, you can typically expect to need a property management company to lighten the load.
It will probably be harder to sell later on
There's always demand for single-family units. They're affordable, they're everywhere, and they're a part of the American Dream. But multifamily properties? Those aren't in high demand with the average consumer -- nor can the average person afford one, either.
Multifamily investing pros and cons
|Easier and cheaper to get started||Less cash flow.|
|You can be pickier about tenants.||Vacancies are costlier.|
|Less turnover.||It's harder to scale.|
|Fewer vacancies.||Returns are down.|
|Easier to sell the property.|
|Financing is typically simpler.|
|Less maintenance and upkeep.|
The bottom line
At the end of the day, you don't have to choose between the two. If you have the capital (and the bandwidth), you could certainly invest in both property types simultaneously.
Generally though, if you're just starting out a real estate investor, single-family rentals are your best bet. They're easier to get into and require less cash, and you have more exit options should something go awry.
And don't forget: There are other, more hands-off ways to invest in real estate, too. Real estate investment trusts (REITs), crowdfunded real estate deals, and real estate stocks are also options, and when done right, they can be great ways to earn passive, long-term income.
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