Upon entering the world of real estate investing, you’ll realize how vast this business is. As a real estate investor, you are offered different types of investment properties to choose from. There are single-family homes, multi-family homes, townhomes, vacation homes, etc. This makes beginner property investors wonder what the best type of investment property is.
Each type of rental property has its pros and cons that separate it from the rest. However, most real estate experts believe that multi-family homes are, in fact, the best type of investment property. There are a number of reasons that lead to this conclusion – which are detailed below. But first, let’s explain what multi-family homes are.
Note: Did you know that Mashvisor helps property investors find the best multi-family homes in any city in the US housing market? To start looking for and analyzing the best investment properties in your city and neighborhood of choice, click here.
What Is a Multi-Family Home?
In the simplest terms, a multi-family home is a type of residential real estate property that consists of multiple units that house a number of tenants. These types of investment properties range in shape and size. There are small multi-family homes (2-4 residential units) such as duplexes, and large multi-family homes (more than 5 residential units) like an entire apartment building. This is the best type of investment property for a real estate investor aiming to go big in the real estate investing business.
What Makes Multi-Family Homes the Best Type of Investment Property?
1. High Return on Investment
The main motivation that drives property investors is making money in real estate. Thus, as a real estate investor, you should always find investment properties that have high potential to yield a good return on investment. This is the first reason why multi-family homes are the best type of investment property. Since these rental properties are larger in size than others and house multiple tenants, they tend to generate a higher rental income. For savvy property investors who keep up with their rental expenses, this leads to positive cash flow – which is one way of making money from real estate investing.
2. Appreciation / Forced Appreciation
Another way to make money from investment properties is through real estate appreciation. This means that the value of your rental property will increase the longer you hold it. This will allow you, as a real estate investor, to sell your rental property in the future for a higher price than your initial investment and, thus, make a profit. Generally, the best type of investment property is that with a high expected appreciation rate. And while single-family homes typically appreciate faster, it doesn’t mean that multi-family homes don’t appreciate at all!
Moreover, a great thing about investing in multi-family homes is that property investors can actually force appreciation! This is not something you can do with a single-family home. A real estate investor can add extra amenities such as a laundry room or a parking space, or provide additional services to force appreciation on his/her multi-family home. As a result, this will add value to the rental property and allow the real estate investor to make a good return on investment. This is another reason why multi-family homes are the best type of investment property.
3. Few Risks
We know what you’re thinking: multi-family homes are larger in size, so how come they have fewer risks? Well, multi-family homes are the best type of investment property because property investors can reduce facing two major risks of real estate investing: high vacancy rate and negative cash flow. Let’s compare multi-family and single-family homes to prove our point.
- High Vacancy Rate: Single-family homes house only one tenant. Thus, if property investors can’t find a tenant for their rental properties, they’ll face a 100% vacancy rate. On the other hand, assume you’re a real estate investor with a multi-family home with 10 residential units and 2 of them are not occupied. So there are vacancies, but it’s definitely not something to worry about.
- Negative Cash Flow: The chances of generating negative cash flow from multi-family homes are little because even if you’re dealing with a vacancy, you’ll still make money and be able to keep up with rental expenses thanks to the rental income from the occupied units. With a vacant single-family home, however, you’ll immediately start losing money because there’s no rental income. This is another reason why multi-family homes are the best type of investment property.
While there is a chance for these risks to arise, if you invest in a good location with high demand for multi-family rentals, the chances are usually slim.
4. Professional Property Management
One reason why beginner property investors wouldn’t think of multi-family homes as the best type of investment property is due to property management. As you should know, excellent property management is one key to successful real estate investing. True, managing a multi-family home takes a lot more time and energy than a single-family home. However, property investors can always hire professional property management to take care of this daunting task.
These companies will handle everything including advertising the rental property, finding tenants, collecting rent, conducting necessary repairs, and tending to tenants’ needs. Even though professional property management companies come with a cost, they will give property investors an almost carefree real estate investing experience. This makes multi-family homes the best type of investment property for a real estate investor who prefers having a passive rather than an active role as a landlord.
How to Find the Best Type of Investment Property
If you’re looking to buy a multi-family home, you can count on us to find the best one in your area! Signing up with Mashvisor gives you access to our search tool: a powerful and heavily customizable tool that allows you to search for the best type of investment property based on specific criteria using different filters. For example, you can set your criteria to find a multi-family home in a certain price range, in a certain neighborhood, and with a certain cap rate!
This tool comes with a heat map function that allows you to find multi-family homes much faster using visual cues. As a result, you can easily compare different neighborhoods and different investment properties to see which one has more profitability for real estate investing.
Sign up with Mashvisor and start using our Investment Property Search Tool to find the best type of investment property in any city and neighborhood across the United States!
The Bottom Line
For beginner property investors, buying and owning multi-family homes sounds like a scary investment. However, as you can see, this is actually the best type of investment property for the medium and long-term. Click here to learn more about how we will help property investors make faster and smarter real estate investment decisions.
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