If you are a rental property investor looking to make your first purchase, you may be wondering if you should invest in a single-family home or a multi-family property. Each type of property brings a unique set of challenges to the equation and can provide benefits for both your pocketbook and portfolio. Here are a few things to consider before reaching a decision.
In plain numbers, a multi-family property will generate more income, as more tenants housed in more units will pay more rent. There is also a significantly smaller risk of generating no income at all as each unit is likely to face turnover and vacancy at different times. That means it is even more likely that the property will sustainably generate income to cover the costs of operation with little or no interruption. A single-family home, however, only has one tenant, and once vacated, the owner will have to cover expenses until it is leased again.
On the flip side, a single-family home is likely to cost considerably less than a multi-unit dwelling, and financing with a traditional real estate mortgage is the standard route. In most cases, once the property has more than four housing units, a buyer must apply for a commercial loan. With this type of financing, there tends to be more restrictions, a more in-depth look into your investment financing, and higher down payment may be required.
Managing the Property
With the increase in rental income from a multi-unit property comes the juggling of multiple tenants. From the needs of the individuals leasing the homes to issues with the units themselves—and the 24-hour nature of many problems—managing a multi-family dwelling can be difficult, especially for those who do not have experience. Because these properties earn more income, engaging with a professional property management company is a viable option to reduce stress while still maintaining substantial profit margins.
For single-unit homes, you can work with a property management company. However, the profit margins tend to be a bit slimmer in these cases. Although the needs of one family are typically simple to manage, most owners of single-unit homes tend to take on such management—and general maintenance of the property—themselves. For properties that do produce higher profit margins, professional management can be a good alternative to self-managing.
Selling the Rental Property
When it’s time to sell the property, maximizing the final return on the investment is generally the objective. Single-family homes tend to be considerably easy to sell, and at a price that makes sense for the investor. New investors often like the idea of an easy-to-manage single-unit home, and the property will also be attractive to families seeking to purchase their primary residence. Multi-family rental properties can still turn a handsome profit, but the pool of buyers will be smaller, and it may take longer to find a buyer in the price range needed. For a quick turnaround, a single-family home may be better while long-term investments will make sense on both fronts.
Making the Right Decision
For new investors wondering whether a single or multi-family property is right, the answer depends on the goals and the needs of the investor. Investors should start by considering the price and the financing options in comparison with the monthly rental income potential of the properties. Next, consider for how long to hold the investment, whether they feel confident managing the property themselves, or whether a professional will be necessary to ensure smooth day-to-day operations of the investment property.