SINGLE-FAMILY VERSUS MULTIFAMILY: WHICH IS RIGHT FOR YOU?
Are you planning to invest in residential real estate? Perhaps you already own a residential property and are wondering what the difference is in managing a single family or multi-family unit? When you’re investing in real estate property, you will certainly prefer one that presents better earning possibilities while remaining cost-effective to manage. Both multi-family and single family properties have distinctive merits and demerits. Therefore, it’s important to understand the differences and similarities between both either via research or the assistance of a reputed property management company.
Before understanding the differences between both property types, let’s define them. Single-family homes consist of one property that can house one family only. Some examples include a house or single unit condo, apartment, or townhouse. Multi-family units (also referred to as multi-dwelling units, or MDUs) consist of separate housing units within one building or various buildings that house more than one family. Examples of multi-family homes are duplexes, apartment buildings, and even triplexes. Now let’s compare how these two types of properties function as investments and how they ought to be managed.
What Are The Similarities?
The common similarity between single family and multi-family properties is their high-interest rates. For either type of investment, you will have to pay higher interest rates (at least 20%) on the mortgage. In general, you can expect to pay more interest since bankers find real estate investment properties a bit risky.
Good Return on Investment
Both the multi-family unit and single-family unit offer the opportunity of profitable returns in the long run. Both these types of properties have the ability to generate more than 1% cost of the property each month, which ultimately leads to positive cash flow. This ensures that you can pay off the mortgage loan through rental income alone.
Whether you own a single family or multi-family unit, a property owner can expect tax benefits with either type of investment. For both, owners receive a deduction related to property and mortgage taxes, which can be very helpful in minimizing overall expenses for your investment.
What Are the Differences Between Single Family + Multi-Family Properties?
When it comes to the differences between single family and multi-family units, you will find many pertaining to the actual nature of the properties as well as their management needs. The key difference is the price and maintenance. Without a doubt, a multi-family property is larger in size and scope and thus demand more maintenance. Here are some of the key differences to consider for your residential investment portfolio.
No. 1: Price
As to be expected, single-unit homes cost less than multi-unit homes, which comprise entire buildings more often than not. You can certainly invest in a condo or apartment as a single-family unit within a complex or building, which is a smaller, more cost-effective real estate investment. In addition to the total cost, you can expect lower premiums and lower insurance interest rates since the insurance will cover the less square footage. Also, you will not have to spend as much on utilities for one single household.
In contrast, you can expect higher expenses for a multi-family property. However, because these investments are larger in scope, property owners manage multiple monthly rental payments in exchange for the possibility of higher returns.
No. 2: Rental Income
Multi-family properties not only generate more rental income, but they also have less risk of making zero income. If you own and manage a single-unit home and don’t have a tenant, you are going to encounter a financial loss for however long the property remains vacant, while still having to maintain the house or unit. However, you will not necessarily experience this problem with a multi-unit home. Even if some units are vacant, you can still expect monthly payments from the occupied units–reducing the possibility of negative cash flow.
No. 3: Appreciation + Tenants
However, an important thing to keep in mind is that the demand for single-unit homes is currently increasing, which simply means more people are purchasing homes rather than apartments or condos. As a result, single-family homes are receiving more appreciation in property value than multi-family homes.
In addition, you can secure more reliable long-term tenants for single-family homes. Generally, the tenants for these types of properties usually take better care of the property and develop a good relationship with the landlord or property manager(s) as part of taking a keen interest in taking care of the rental as a living space. Also, single-family homes tend to have less turn over than multi-home properties.
Because there are more tenants involved with multi-family properties, they tend to be more complex to manage with more move-ins and move-outs. Property owners for these types of rentals will have to deal with different types of tenants who might not be long-term or courteous. You will have to take care of each and every tenant and make the extra effort to ensure that they are maintaining your property well.
No. 4: Maintenance
Unsurprisingly, multi-family homes require more maintenance than single-family homes. Single-family homes will not demand much maintenance, and with the proper understanding (and rental agreement) with tenants, property owners may only need to take care of basic upkeep. However, property owners for multi-family units will need to take extra care to maintain their rentals as well as the grounds and walkways.
No. 5: Exit Strategies
With a single-family property, owners will have more exit strategies in terms of the entire investment’s life. Whenever the market conditions are most favorable, owners can sell their single-family properties for a higher return on the investment. However, multi-unit properties tend to be harder to sell at a profit since the demand for these properties is not as high (or varied). Many people seek out single-family homes, since these are more affordable properties and accommodate their personal goals and lifestyle. However, multi-family units are understandably more expensive and tend to attract real estate investors with a portfolio of properties.
Rental Property Management: Single Family vs. Multi Family Rentals
Real estate property management is not always an easy endeavor. Without the proper resources and knowledge, you might miss out on certain benefits of the industry, as well as returns and profits. If you plan on managing a property on your own, consider investing in a single family home, as these types of properties tend to be more affordable and easy-to-maintain. In addition, you will not have to manage multiple tenants and families. More importantly, you can sell the property anytime to make more profits.
However, multi-family properties also have distinct advantages. If you’re looking for higher monthly rents and possibly higher returns, then multiple units within a building, apartment complex or duplex can yield more financial results. Keep in mind that the size of the property will determine the available financing options. When a multi-family property has four or fewer units, they can qualify for the same rates as single family properties. With five or more housing units within a property, property owners are required to pay higher interest rates.
The number one benefit of the multi-family unit is that this type of property is less likely to experience negative returns due to the vacancy rate. Also, you can easily manage your tenants when they are located in one place, as opposed to if a rental property management company manages multiple single-family homes throughout a city or regional area.
Now that you know the key differences and similarities between single family and multi-family properties, you can decide on how to best manage each real estate investment. The following are questions you should answer before purchasing and managing your residential property:
How much monthly rental income do you expect from your unit(s)?
How much will you be able to spend for a down payment?
Do you need the assistance of a property management company?
Are you a first-time real estate investor?
Do you want to hold the property or have an exit strategy in place?
Which option is better? Ultimately the option to invest in multifamily vs. single-family is up to you but once you decide to invest in a property, your goal should be to hire a property manager to manage that property for you.
A property management company will save you the time, money, and hassle of managing your properties yourself so you can focus on enjoying passive income from your rental properties.
At Overland Management, we love working with new investors. You can rely on our experience and our expertise in the property management industry to help you achieve your property investment goals.