Investing in the Single-family and the multi-family space is a smart decision. However, choosing the best strategy between the two has been a problem for many people. If deciding between the two is what has been setting you back all this time, below are some points to help you make a more informed choice.
The monthly operating cost is one of the criteria that needs to be considered when choosing a strategy. A single-family property means there is a single unit and can only be occupied by one tenant, which means you only have to cater to an individual or a family’s need. This means the monthly energy cost, refuse disposal, and insurances costs are low.
On the contrary, the multi-family investment space requires a higher running cost because it consists of more than one unit under a single roof. Several units’ means more tenants to deal with and more monthly expenses to be responsible for. But unlike the single-family properties, the multi-family properties have a higher cash flow to make up for the expenses.
Managing single-family property can be frustrating. Managing properties located across different localities can be tiresome. Any need to check on your properties will require you to move around. However, hiring a property management company for a single-family property is not financially viable as the charges required by these companies are high, typically 10%.
On the other hand, investing in multi-family properties means you have more units in one area. This property type is easy to manage. Carrying out routine checks on your property does not require you to move from one location to the other.
The requirements for single-family loans are less stringent. Apart from the low cost of acquiring the property and financing, finding a mortgage lender to finance your project is easy. The down payment required and the mortgage rates are typically low. And if you know your way around, you could find mortgages that require zero down payment.
Alternatively, buying a multi-family property requires high financing because the properties of this type can cost several millions of dollars. Lenders require a higher down payment, more paperwork, stringent requirements, and sometimes finding a lender to approve your loan is time consuming. So, if you choose this investment strategy, you need to be patient and play according to the rules.
When you buy single-family properties at different locations, you are diversifying by reducing the risk of losing all your money when a single market is unfavorable. Diversification by unit in multifamily is much more difficult by nature because there are several units under one roof. This could magnify a negative effect from the economy, making these investments riskier.
Unless you own multiple single-family properties, apartment property investors usually see higher income. Inversely, the presence of more than one unit in an apartment means the chances of all tenants evacuating your property at once is very low. For example, an apartment with 20 units is only 10% vacant when it loses two tenants. Other occupied 18 units will cover for the expenses required by the vacant two. But if a tenant vacates a single-family property, it means the property is 100% vacant and the property owner needs to find other means to pay for the property’s expenses. This means that the tendency of running into foreclosure in multi-family investment is much lower compared to the single-family investments.
In Single-family investment properties, you can only force appreciation on one unit and for one tenant. This means that no matter what you do, the value and appreciation will only affect one unit. Alternatively, for a multi-family property, a simple repair on any common area can significantly affect the ROI of the property because it will force the appreciation on all units in the property.
For example, improving the curb appeal of a single-family house can only increase the rent of one tenant. While improving the curb appeal of an apartment building with five units will affect the monthly rent of all the units.
Furthermore, to help improve your choice of strategy, here are some questions to help you make better choices:
- How much income do I plan to get every month?
- What is my aim of investing?
- Do I have time to manage my properties or do I need to work with a property investment company?
- How much financing can I get?
- How fast do I want to grow my Portfolio?