Single Family Investing vs. Multifamily Investing
Consider the pros and cons with single family and multifamily investments to help you decide which type of property is right for you!
When it comes to residential real estate investing you have the option to invest in single family homes or multifamily units. Consider the pros and cons with each to help you decide which type of investment property is right for you!
Single Family
Single family homes are detached homes, meaning they do not share walls or utilities with other homes/units. They are designed for a single person or one family to live in.
Pros
Fewer upfront costs - The 10% to 20% down payment needed to purchase a single family property will be less than if you were trying to purchase and/or finance a multifamily property
Quick and easier to finance - In most cases, single family homes do not require unique or complicated loans. Therefore, it is quick and easy to get approved for financing.
Low turnover rate with tenants - Single family homes attract high quality tenants who are more likely to renew their lease year after year and take better care of the home during the rental period.
Large pool of buyers - When it becomes time to sell, not only will individuals and families be looking for a single family home, but other investors will also be looking to buy a new property to add to their portfolio
Provide relatively simple exit strategy - With greater demand and a large buying pool comes an improved exit strategy. If there are multiple offers on the property, there’s no need to worry about holding onto the property for longer than intended.
Cons
Potential for vacancy - Although a large buying pool is associated with single family homes, it is market dependent. If a tenant needs to move out, there is a possibility that the property could sit vacant with no cash flow.
Less monthly income - Single family homes only generate income from one single unit providing less monthly income than a multifamily property. Consider location when purchasing an investment property because depending on the market your property sits in will determine how far above your mortgage you’re able to charge.
Value is based on nearby comps - The value of the home will be assessed based on homes in the area, not based upon the amenities you provide. This limits your ability to increase rent.
Multifamily
Multifamily properties contain more than one attached units, such as duplexes, triplexes, quadplexes or apartment complexes.
Pros
Expand investment portfolio more rapidly - If you mortgage ten duplexes you would have twice the amount of units providing cash flow than if you were to invest in ten single family homes.
Cheaper cost per unit - The overall purchase price of a multifamily property will be higher than purchasing a single family home. However, you get more units at a much cheaper cost.
Less chance for complete vacancy - The chances of all tenants in a multifamily complex moving at once are very slim. If one tenant moves and you’re unable to immediately back fill the unit, then at least you have the other tenants still paying rent.
Higher cash flow - As an investor of a multifamily property you have the ability to increase value by adding amenities, which allows you to increase rent. This could make a small multifamily unit comparable to the rent of a single family home. Let’s say you can charge $2,800 per month for a single family home and, because of the amenities at your quadplex, you can charge $2,000 per month, per unit. Therefore, you would be bringing in $5,200 more per month in rent at your quadplex.
Cons
Less reliable tenants - Although the risk of complete vacancy is low, you will likely have less consistent tenants with multifamily units. Tenants are also less likely to treat the unit with the same respect as one would with a single family home rented long term.
Smaller buying pool - Multifamily properties are not competitive in the home buying market among families. Therefore, your buying pool shrinks to other investors.
More money required upfront - Multifamily properties can be vast and require a much larger down payment and a higher loan amount. Financing is very much still possible, but will require a bit more for approval.
The type of property you choose depends on your goals and the market you’re looking to invest in. Both property types have the potential to be an excellent investment. Whatever property type you choose, CALCAP Lending can help!
