Targeting Your Investment Property: Should You Invest in Single or Multi-Family Homes?

2022-05-09

Targeting Your Investment Property: Should You Invest in Single or Multi-Family Homes?

A gorgeous brick multi-family home in the City of Detroit
Source: Zillow

 

Of the many property types out there, two of the most popular options are single-family homes and multi-family homes. These may seem like merely different sizes of the same home, but the latter is so much more than just a larger home upon closer inspection. And that begs a question.

Should you go for single-family home investments or go big for larger, multi-family properties?

There’s no right or wrong answer to this, but there are several factors to consider when deciding which property type to invest in. As a real estate investor, your ultimate goal is to gain the most returns while paying for monthly mortgage fees, among other expenses.

Let’s compare single-family homes vs. multi-family homes to see which one is best for you.

Advantages of Single-Family Homes

Right off the bat, a single-family home is a freestanding residential property that’s usually made for one family. Tenants will get their own kitchen, yard, utilities, HVAC system, entrances, and bathrooms. They’ll also have direct access to the street—basically, it’s like having their own property.

Single-family homes don’t have shared walls with their neighborhoods, which means they are very private. They will also have their own yard which provides them with more space and outdoor areas that they won’t get with an apartment unit or a basement suite.

These are the top 5 advantages of investing in single-family homes:

1. Less Expensive

The biggest advantage of single-family homes is that it’s more affordable than multi-family homes. You won’t need to have a lot of capital, but you can still find cash flow opportunities for under $100,000 (like in the City of Detroit). 

On the other hand, a multi-family home can cost well over a million dollars, depending on its size and location. Not everyone has that kind of cash just lying around.

Here are the main financial differences:

  • Lenders will require a down payment of 20% for residential real estate loans, so investing a small amount of money means lower payments in general. 
  • Lenders will require cash reserves for at least 6 months of payments for single-family homes, and up to 12 months for multi-family properties.
  • Commercial loans have higher interest rates of around 2-2.5% and will ask for your personal income and business tax returns information. This means you’ll have to provide the property’s operating statements for at least the last 2 years and your rent roll.

Single-family homes aren’t just small. Their financial requirement is also less significant than that of a multi-family home. This makes them ideal for beginner investors or those with tighter budgets.

2. Growing Demand

Single-family rentals are increasing in demand, so much so that they are the fastest-growing segment of the US housing market. They outpace both single-family home purchases and multi-family housing, so industry experts are forecasting the growth of single-family homes to skyrocket in the near future.

Additionally, the US Census estimates that the number of single-family homes in the US increased by 31% in the past 10 years that followed the famed housing crisis from 2007 to 2016. In contrast, multi-family rentals only increased by 14%. 

And with many individuals having financial problems after the COVID-19 period (on top of student loans, credit card loans, and lower-wage levels), single-family rentals have become one of the most attractive alternatives to larger properties.

3. More Resale Opportunities

Given that single-family homes are generally higher in demand and require smaller capital across most real estate markets, they are also easier to resell than multi-family homes. In essence, they have a lower barrier to entry and exit compared to their larger counterparts. 

With the ability to sell to real estate investors and homebuyers, you don’t have a hard time scouting in the large buyer pool for single-family homes that apartment complexes and duplexes don’t have.

4. Easier to Diversify

As investors, we always prioritize diversifying our portfolio to spread the risk thinner. With single-family homes, you can easily invest in multiple areas and markets, so any unexpected fluctuation won’t harm your entire portfolio as much. In contrast, a multi-family home with 10-units means that you’re locked in on that market and are at the mercy of its ebb and flow.

Connecting to our point earlier, single-family homes also have a larger buyer pool. That makes it easier to cut one loose and reinvest your money elsewhere should the need arise.

5. Lower Tenant Turnover

Since single-family homes are a much bigger commitment than renting out a dwelling space within a multi-family property, tenants will rarely leave a single-family home compared to a unit. You’ll have less frequent vacancies and expensive tenant turnovers, which means more savings for you, especially if you factor in the following costs:

  • Rehabbing and fixing up the property
  • Deep cleaning the properly to feel brand new again
  • Marketing the property to prospects
  • Screening all the applicants before choosing one
  • Showing the property to the prospects
  • Paying for all the expenses while the property sits unoccupied
  • Releasing with new tenants

Statistics show that the average single-family home tenant stays for 3 years, almost twice the duration compared to multi-family rentals. Many tenants even reside in the single-family property for 5 to 6 years—it’s not unusual to have tenants treating a single-family home as their own.

Data also shows that more than half (52%) of single-family rentals are by families compared to multi-family rentals, where only 30% are families. We all know how difficult it’ll be to pull out your kids from school and relocate to somewhere else.

Advantages of Multi-Family Homes

Now, let’s discuss the advantages of multi-family homes like duplexes, triplexes, and quadplexes.

Multi-family homes usually have more than one unit built either side-by-side or on top of each other. Many may share a common building door but still have their own unit doors.

Even though multi-family homes will have several units, they are often only owned by one person. It’s also pretty common to find landlords or investors living in one of the units and renting out all the rest, so they have an extra income stream to help pay off the property.

Here are a couple of advantages of investing in multi-family homes:

1. Scale Faster

Let’s say you want to grow your investment portfolio by 15 units. If you choose single-family homes, you’ll have to find 15 separate houses which means dealing with 15 different sellers, 15 thorough inspections, and probably even 15 mortgages. 

That’s a lot of work. 

Instead, it’s better to purchase a 15-unit apartment building that’ll instantly give you 15 more properties in a single transaction. Of course, lenders will want to take a closer look at your financial capability to ensure that you can own an apartment. But it can be a lot less hassle than investing in an equal number of single-family homes.

2. Economies of Scale

Multi-family homes will also give you economies of scale across all property management tasks. For instance, fixing one roof or any common area means repairing all 15 units simultaneously. Not only will that cost less money and time, but it increases the property value of all 15 units at once.

Having reduced costs per unit will also work to your benefit for insurance policies, showings, inspections, maintenance, and more. If you plan to hire third-party management, you’ll hire only one property management company for the multi-family home, instead of hiring multiple companies to handle single-family homes spread across several locations. 

Property managers will also charge less per unit for multi-family rentals than many single-family properties. Plus, contractors will usually offer a better per-unit rate than doing exactly the same work on single-family homes.

3. Greater Cash Flow

As you can imagine, multi-family homes will translate to higher rental income compared to just one single-family home. Of course, you can always own multiple single-family properties. But that’ll increase your overall expenses as well.

With multi-family homes, you’re far less likely to see negative cash flow or rental income. Unlike a single-family home where your occupancy immediately drops to zero once they move out, that same scenario in a 15-unit multi-family home only translates to 6.67% vacancy. You’ll still have 14 other units that’ll continue your rental income to cover your mortgage and operating costs.

Yes, we understand that higher monthly cash flow doesn’t equate to better investment returns. So, you’ll also have to depend on many renters to send in their monthly rent compared to just one. But, in general, multi-family homes will give you a much more significant rental income than a single single-family home.

4. Easier to Finance (Sometimes)

Given that multi-family homes require a much larger capital, some lenders will have rigorous approval processes and higher rates for multi-family property loans. However, there will be lenders that make it easier for you to obtain a loan for a million-dollar apartment complex than a single-family home. 

This is all thanks to cash flow.

Remember that multi-family home cash flow will rarely dry up, and the risk of foreclosure is significantly lower than that of a single-family home. It’ll still depend on some factors, but multi-family properties are generally safer for lenders.

Plus, the value of a multi-family home is based on the income it generates, while the value of a single-family property will fluctuate greatly with the real estate market. Given its profitability and stability, you can secure more flexible financing with better terms.

5. Living Opportunities

As mentioned earlier, you can also live in one of the units of your multi-family property, so you won’t have to pay rent elsewhere or take out another mortgage for a primary residence. 

The advantage is even greater if you plan to occupy a unit in a 2- or 4-unit multi-family home, as these buildings will still qualify for many owner-occupied, low-down-payment financing options. For example, a government-backed FHA loan will only have a 3.5% down payment, while VA loans will have none.

Choose the Property That’ll Fit Your Portfolio

So, which is better? Well, at the end of the day, it all boils down to what you want to prioritize as an investor and your financial capability to invest in real estate.

To sum up, single-family homes are great for those with tighter budgets and will give you more portfolio flexibility. And multi-family dwellings are similar to “buying in bulk” and will allow you to scale your investments easily. Both offer significant advantages, albeit to varying degrees.

Need more help investing in residential properties? Our team of expert property managers has over two decades of experience handling both single-family and multi-family properties. 

Get in touch with us for professional help today!

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