Investing in Rental Property: Single-Family or Multifamily?
Are you considering getting into the real estate business, but unsure about the kind of property to invest in? Your choice depends on various factors like your current situation, objectives, risk-taking capacity, and overall preference. Let's go over single-family and multifamily rental properties to help you figure out what's best for you.
Single-Family rental property refers to a residential property with just one unit, typically a house in the suburbs. Only one group of tenants lives there.
On the other hand, Multifamily rental properties have multiple units, anywhere from two to hundreds. For the purpose of this article, we'll concentrate on residential multifamily properties with two to four units, such as duplexes, triplexes, or fourplexes. This means two to four groups of tenants can live there.
Why Choose Single-Family Property?
Less Initial Investment: Single-family properties usually require less money to start with, making them a good option for those with limited funds.
Lower Tenant Turnover: Tenants of single-family properties often form emotional attachments to their homes and neighbors, making them more likely to stay longer.
Growing Demand: Over the past year, there has been a 66% increase in the number of single-family homes being rented.
Better Resale Opportunities: Single-family homes have a wider market, as they appeal to both homeowners and real estate investors.
But Keep In Mind...
Limited Cash Flow: Since only one group of tenants live in a single-family property, your rental income is limited.
Costly Vacancies: If a tenant fails to pay rent or there's a vacancy, you might have to bear the full mortgage cost.
Portfolio Expansion is Tough: To have at least 10 units, you'd need to invest in 10 separate single-family properties.
Why Choose Multifamily Properties?
Rapid Portfolio Growth: Investing in multifamily properties allows you to quickly build a larger portfolio.
Economies of Scale: You can increase the value of multiple units at once with building-wide improvements. Plus, management fees and contractor rates are often lower.
Higher Monthly Income: Multifamily properties can generate more rental income as you have multiple tenants.
Lower Personal Housing Cost: You can live in one of the units while renting out the others, potentially reducing or even eliminating your housing costs.
But Keep In Mind...
Challenging Tenant Screening: Managing more units means dealing with more tenants, which could lead to higher turnover if not done right.
Difficult Financing: Multifamily properties usually require a higher down payment and more cash reserves.
Management Challenges: More units mean more maintenance requests and problems to solve. Self-managing can be tough, so consider hiring a property management company.
So, Single-Family or Multifamily?
The final decision depends on you. Be sure to align your choice with your goals. It's a good idea to consult with financial advisors and tax experts.
If you're new to real estate investing and prefer to play it safe, single-family homes might be better for you. If you're more willing to take risks, want to expand your portfolio quickly, and earn more income, then multifamily properties could be a good fit. Both options are great for first-time investors, and you might want to invest in both types down the line to diversify your portfolio.
Learn more about this topic at:
https://www.forbes.com/sites/forbesbusinesscouncil/2023/01/25/how-to-invest-in-multifamily
