Investing in multifamily properties versus single-family 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.
For those considering taking the plunge and investing in multifamily properties or single-family properties, it’s important to understand which investment vehicles do what. Deciding among single-family or multifamily properties is largely about personal preference and goals, and the following will explain the major differences between the two investments, including the various advantages and disadvantages of each strategy. If you are looking for an answer for the single-family vs multi family debate, I encourage you to keep reading.
Investing in single family properties 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 homes, especially for beginner investors. The following examines the benefits of investing in single-family properties:
More Affordable: 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. 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.
Higher 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 amount 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 and hiring a professional management company to oversee the investment.
Investing in multifamily properties and single-family homes continues to be one of the more popular investment vehicles for both seasoned and up-and-coming investors. Like with any real estate deal, however, investors shouldn’t go into it blind or uninformed. Instead, investors need to perform their due diligence to ensure the deal not only makes sense financially, but it aligns with the long-term strategy for their business.