Real estate investing and property management world may sometimes be a tough one, full of incomprehensible tricks, property management secrets, with many ins and outs of property management world you still have to learn about.
Should you invest in single or multi-family properties? This is one of the hottest debates in the world of real estate investing. Both options offer a number of compelling advantages. But, to make an informed decision, it’s imperative that you understand the differences between the two.
Multi-Family Properties
Multi-family properties, also known as MDUs (multi-dwelling units) are a type of residential housing that has either at least two units under one roof or multiple buildings in one complex. They are the least common type of residential property but, because they offer investors an additional source of monthly income, they definitely deserve a closer look:
- Better control over value: The more income a property generates, the higher its value. Thus, because multi-family properties consist of several units, they tend to be more valuable than their single-family counterparts.
- Bigger tenant pool: These properties offer investors less risk because, unlike single family units that can lose income when vacant, these properties have several units, which can reduce your total economic loss.
- They epitomize scalability: Instead of purchasing a single property and growing your business one transaction at a time, a multi-family property allows you to get several transactions from one building. This makes them an excellent choice for those who want to quickly grow their real estate investment portfolios.
- Lower cost per unit: Although the initial investment for your MDU will be higher (when compared to a single-family property) the cost per unit is usually lower.
Single Family Properties
Single-family properties, also known as SHFs or single family homes, are defined as a residential unit built on a single lot, without any shared walls. Because of fast rising rental rates and record low mortgages rates, these types of investment properties off an assortment of advantages that include:
- Cheaper: One of the most obvious advantages to this type of investment property is cost. That is, they tend to be more affordable than multifamily properties, even in terms of down payments. For instance, instead of the typical 25-30% down payment required for a multi-family property, SHF investors only need 10-15%. And, that’s not all, most rental agreements require the tenant to take care of utilities and landscaping, two factors that reduce long-term maintenance costs. Additionally, insurance rates for those types of properties tend to be more affordable as well.
- Easier to finance: Although financing rules and guidelines vary, it’s typically easier to gain financing for a single family property than its counterpart. Higher loan-to-value (LTV) ratios and lower interest rates are the biggest benefits of financing a single family home.
- More exit strategies: It’s easier to sell a single-family property than one for multiple families. For instance, you can sell an SFH to a family who wants to buy their own home, another investor, or lease it to the current tenants on a rent-to-own basis.
Whether you invest in a single family or multifamily property boils down to your personal goals and preferences. But, no matter which option you choose, make sure that you do your research to ensure that it not only makes financial sense, it’s in alignment with your long-term investment strategy as well. Good luck!