Breaking down key differences between investing in single-family vs. multifamily homes
For those who are considering investing in real estate, it can be hard to pick between a single-family home and a multifamily property. There are a variety of nuances, advantages, and topics associated with choosing a single-family home or a multifamily property as a real estate investment.
Many of the variables boil down to the individual goals, preferences, and experience level of the real estate investor. Simply put, there is no such thing as a one-size-fits-all approach to investing in real estate. Everyone is facing a different financial situation and a unique set of circumstances. It is, however, important to understand the potential pros and cons of each choice before you decide to invest.
Some initial topics for the investor to consider include risk tolerance, ease of management, income needs, down payments, and long-term goals. Both single-family homes and multifamily properties provide an excellent pathway to real estate investing. Before making the leap and purchasing a real estate investment, however, it’s important to understand the pros and cons associated with single-family homes and multifamily properties, so you know which form is right for you.
While a multifamily property can often offer a higher return, a single-family home can be a great place for the budding real estate investor to start. A single-family residence can be defined as a free-standing residential structure maintained and used as a single dwelling. The name is appropriate, as this type of investment only consists of one unit of housing. Generally, single-family homes are built on a lot that is larger than the structure, so there is often a front yard, backyard, and garage.
The wealth of advantages associated with single-family homes and ease of entry make them a popular choice for beginners. Compared to multifamily properties, single-family homes offer a number of advantages, listed here:
- A lower price of admission. Not only is there often more inventory and a lower purchase price associated with a single-family home compared to a multifamily property, but the down payments, insurance, maintenance fees, and property taxes are often much lower as well. When purchasing a multifamily property, the buyer will need to invest approximately 25 – 30 percent of the purchase price to the table in the form of down payment. In the case of a single-family home, however, it may only be necessary to bring 10 – 15 percent. It could even be possible to convert an existing primary residence into a single-family home investment property, by finding your perfect new home and moving. This could save tens of thousands in interest payments over the years.
- Sweeter upside. As mentioned above, there is simply a larger amount of single-family homes that are available. More people want to buy single-family homes than multifamily properties, so the demand is higher and single-family homes therefore tend to appreciate faster than other forms of real estate investments. Most people who choose multifamily properties are looking for income over appreciation. Due to financing constraints, the pool of buyers that can afford a multifamily property is much smaller, which helps to maintain a relatively low level of demand.
- The lower purchase price has advantages. Those who are taking their first steps to becoming active real estate investors often choose single-family homes in order to take advantage of lower interest rates, smaller down payments, and higher loan-to-value ratios. Of course, the lower purchase price associated with single-family homes has an impact on all of these factors, and this is partially why single-family homes are among the most popular real estate investment strategies. Those who consider the scenario mentioned previously, in which a homeowner converts a residence into a rental property, do so to capitalize on the interest rates and down payment amounts that are only available to owners occupying a primary residence. Those who seek to purchase a single-family home as an investment, however, will pay between 0.25 percent and 0.5 percent more than those who purchase a primary residence.
- Less of a burden. Even if you hire a property manager, dealing with the maintenance of a real estate investment can be costly and time-consuming. Shouldering the burden of managing and maintaining a multifamily property can be too much for some to handle, so it is easy to see why they opt for a single-family home. With a single-family home, there is only one set of tenants to deal with at a time and only one building to repair. The management costs are therefore lower. This point is compounded by the fact that most leasing agreements pertaining to single-family homes include a clause requiring the tenant to pay for utilities and take care of the landscaping.
- Tenant turnover. Lastly, these homes have lower tenant turnover, meaning that you won’t have to hassle with contracts, re-listing the home, and managing relationships with changing tenants nearly as often.
As the name implies, a multifamily property includes two or more units of housing, located underneath one roof or within several buildings in one complex. The most popular forms of multifamily properties include apartment buildings, duplexes, ‘quad-plexes,’ townhomes, and condos. Most units will have a dedicated living space as well as its own kitchen and bathroom.
In the vast majority of scenarios pertaining to multifamily properties, the investor will end up with a deed that shows ownership of both the building and the land on which it is located. As with almost any form of real estate, multifamily properties can be owned by one person or a group of investors.
Multifamily properties are a great choice for the savvy real estate investor, as they have the potential to generate a solid income stream, along with decreased risk exposure and steady but modest appreciation. Some of the chief advantages that a multifamily investment property could offer the real estate investor include:
- Monthly paychecks. In a perfect world, the real estate investor who completes the necessary due diligence will have an opportunity to find a favorite ottoman, kick up his or her feet, and watch the rent checks come rolling in each month. Purchasing multiple properties can minimize transaction costs and generate multiple streams of rent income from one investment. It may not exactly be passive income since there will always be maintenance and management costs, but the idea that multifamily properties can produce a monthly paycheck without much hassle or effort makes them an attractive target for many real estate investors. An added benefit is that multifamily properties give people the option of living in one unit and renting out the others. This can aid in obtaining financing, as the rental income from the other units could potentially be considered as a positive for the investor and help to qualify for a bigger loan amount.
- Decreased risk exposure. It may seem counterintuitive that a real estate investment with a higher price tag also comes with less risk. That is the case with multifamily properties, however, in comparison to single-family homes. Since multifamily properties have multiple units, vacancy is less of an issue and it is much more likely that cash will flow to the investor each month. In the case of a single-family home, one or two months of no rent can have an extremely negative impact on the investor’s pocketbook.
- Go big or go home. As mentioned above, purchasing a multifamily property is a viable way of decreasing transaction costs. With a multifamily property, a real estate investor can dramatically increase the diversity and well-being of his or her real estate investment portfolio in the course of one afternoon at the closing table. This is a strong contrast to a single-family home, where only one deal could take hours, days and weeks to perform due diligence, negotiate a price, do inspections, and close.
Choosing the perfect real estate investment strategy to fit your individual needs and goals can be a challenge. There is simply no right or wrong answer. Considering the fact that single-family homes and multifamily properties each present a unique set of advantages, benefits, and drawbacks, it is easy to see why real estate investors can sometimes argue so passionately on behalf of their favorite.
This discussion only scratches the surface of the subject that is real estate investing. Connecting with a commercial specialist who will sit down with you, assess your needs, discuss today’s market, and help you identify the strategy that is best for you is a great place to start.
Find a local market expert from Berkshire Hathaway HomeServices California Properties today.
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