It is universally known that investing in rental properties can bring a good return on the initial investment paid. This is more guaranteed if a real estate investor is able to find a specific winning investment strategy to follow. Having a defined investment strategy helps set the tone for the future as far as the investor is concerned even though real estate investors usually tend to diverse once they have gained enough experience. Two of the most common real estate investment strategies that people pursue are single family homes and multi family homes.
To better understand the difference between single family homes and multi family homes, one must first understand what each one is as an investment opportunity. Single family homes are defined as real estate properties that consist of one property unit that houses only one family; the property can be a condo, a house, or a townhouse amongst others. On the other hand, multi family homes are defined as real estate properties that have more than one unit, which can ultimately house more than one family; the property can be an apartment building, a duplex, or triplex, to name a few.
Now that we know what single family homes and multi family homes are, it is time to answer a more important question that real estate investors have. What is the difference between the two in terms of real estate investing and which one should investors go for? However, to answer the question about their differences, we must first find the similarities between the two as investment properties:
Similarities between Single Family Homes and Multi Family Homes
- Investing in either of these rental property types will require an investor to pay high interest rates and a down payment of at least 20%, which could be a hefty price for some real estate investors. However, this can change if the purpose of buying this property is for residential purposes for the owner and not as a real estate investment. Banks are stricter on investment properties because they are more risky.
- Single family homes and multi family homes have a good return on investment in the long term. Both types of income properties are usually able to generate more than 1% of the cost of the property per month; this will lead to a positive cash flow. Taking a mortgage loan to fund the purchase of either rental property type can be beneficial for investors; through rental income, real estate investors are able to pay off mortgage expenses with ease.
- Investing in either of these income property types will give the owner tax benefits in the form of tax deductions related to mortgage and property tax, which can be very helpful to reduce expenses.
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Now that we have gotten a basic understanding of how single family and multi family properties can be similar in many aspects, understanding the differences between the two can be more detailed:
Differences between Single Family Homes and Multi Family Homes
Single Family Homes
This is one of the main advantages of single family homes. This type of rental property has a lower cost for investment than multi-family properties, which makes it more affordable to more investors. The total cost is not only affected by the price of the property but by other factors as well. Insurance rates for single family homes are lower less because the insurance covers only one housing unit. Utility expenses are usually non-existent (from the point of view of the investor and landlord) in a single-family property rentals since most rental agreements require tenants to pay most or all of the utility expenses.
Appreciation is Higher
Due to more demand and focus on single family homes, these tend to appreciate more than multi family homes. Lenders usually see the difference between both when valuing them. Multi-family properties are valued based on the conditions of the real estate property and the rental income they make; meanwhile, the valuation of single-family properties is purely based on supply and demand factors, and demand is not lacking at all.
The fact is that tenants who rent single family homes usually view that rental property as their own home and tend to take good care of its condition by constantly communicating with the landlord. Single-family properties also have way less turnovers than other property types. Having one property to manage also makes it easier for first time investors in the real estate market. Having the daunting task to manage a multi family home with little real estate experience can be a bit tricky to navigate through.
More Exit Strategies
If a real estate investor decides to sell a single-family property, he/she will have more chances of selling it quicker and for better money than multi-family properties; this creates better exit strategies for investors. Single family homes are in demand by investors, families buying a home, and as a lease-to-own option. Multi-family properties are limited to investors in real estate.
Higher Rental Income
This factor is the main reason that makes investors go for multi-family properties as a real estate investment. The fact that an investor can purchase a rental property that has multiple units with each one of them generating a monthly rental income makes it a very desirable investment. Compare that to single family homes where a real estate investor has only one source of rental income from one tenant. This makes multi-family properties a safer investment in terms of constant cash flow from various sources.
Less Vacancy Issues
The possibility of vacancies in multi family homes is not absent; however, it is definitely less costly and less frequent than vacancies in single family homes. If one of the units is vacant for a month or two, the landlord will still be making rental income from the other units that are being rented. Single-family property owners don’t have that luxury, and having a vacancy basically means that their rental income goes to zero.
Controlling the Value
With a multi-family property, a landlord will have the chance to have the fate of the income property in his/her own hands. The fact that these type of real estate properties are valued based on the rental income they generate makes real estate investors become more motivated to get the maximum income from their property. The future valuation of the real estate property rests solely on the hard work and creativity of the investor. Single family homes are subject to economical factors in their valuation process.
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The main idea is that both single family homes and multi family homes can be a very profitable real estate investment. It comes down to which strategy or type of investment an owner wants to be a part of: Investing more money in a risky yet more profitable investment like a multi-family property or choosing the more stable long-term investment of a single-family home. It all depends on preferences, involvement level expected, and budget that each investor chooses.