What’s the better option: a single family home investment, or multifamily home investment? The answer isn’t as clear-cut as you may think. Both types of properties have advantages and disadvantages. It all comes down to your risk appetite, personal preference and investment goals.
The Advantages of Single Family Investments
Many real estate investors start with single family investments because they offer many advantages. These are properties with single detached homes that you can either rent out to tenants or fix and flip.
For many investors, especially beginners, single family properties are more accessible than multi-family properties from a financial standpoint. In many cases, single family homes are more affordable than multifamily properties.
The median price of a home in the U.S. was $295,300 in June 2020. Multifamily properties, even smaller ones in less expensive regions, can cost significantly more.
Conventional lenders generally require a 20% down payment. Many investors can self-fund the down payment for a single family property, which makes it much easier and quicker to close the deal.
Approximately 35% of single family homes are rented. Stagnant wages, student loan debt, credit card debt and a higher cost of living has made it more difficult for young adults to transition into homeownership. Many young adults and young families are choosing to rent single family homes instead of apartments in multifamily properties.
The Advantages of Multifamily Home Investments
The rental industry is strong, with rising rates in many cities across the country. A rise in people relocating has made multifamily housing a leading investment option. Compared to a single family home, multifamily housing has several advantages.
Multiple Streams of Revenue
Multiple units allow investors to rent out each unit in a single building. Since these properties often have two to four units, it’s possible to collect rent from four different tenants. The multiple streams of revenue open up a myriad of possibilities to the investor.
In the right market, two or three units, in a four-unit building, will be able to cover the entire mortgage payment.
Profits rise as more buildings are rented out. With a multifamily dwelling, it’s possible to rapidly increase profits and grow a portfolio at the same time. The additional revenue allows investors to purchase additional properties and continue building their wealth.
Lower Vacancy Risks
Multifamily properties have multiple units, so if one tenant moves out, other tenants will still contribute to your monthly cash flow.
With a single family property, the loss of a tenant is far more costly because the entire property remains unoccupied until you find a new tenant. The loss of income means that you will have to cover the cost of the mortgage, utilities and other expenses out of your own pocket.
Properties with multiple units have much lower vacancy risks and are, therefore, viewed as a lower risk investment to banks. This can potentially make it easier to secure financing for the property.
Both a multifamily and single family home investment will bring in monthly income and are a great addition to an investor’s portfolio. Capital will dictate which is the right investment for each investor as well as location.