So, you’ve made the very wise decision to invest in real estate. That first decision was probably an easy one. Want to make money? Invest in real estate! It’s a no-brainer. Now, however, you’re up against the tougher questions. For instance, which is the right real estate investment for you: single family vs. multi family rentals? Residential real estate investing or commercial real estate investing?
This decision is not one to make lightly. A future real estate investor needs to thoroughly compare single family vs. multi family rentals. You don’t have to worry, though. We’ve got you covered. We’ve outlined all of the main things to take into consideration when trying to decide between investing in single family vs. multi family rentals.
Related: 5 Tips on Researching Investment Properties
Single Family vs. Multi Family Rentals: Rental Income
Unless a real estate investor owns multiple single family homes, rental income will automatically be higher for multi family homes. This is because multi family homes have more housing units and therefore more tenants occupying and providing rental income at any given time.
When it comes to the rental income from single family vs. multi family rentals, multi family real estate investing takes the cake. Not only is there more rental income, but there is also less of a risk of facing $0 in income. If one housing unit becomes vacant, the multi family home is likely to have other occupied units to continue covering any costs of the investment property. The risk of ending up with a negative cash flow property is significantly lower.
With a single family home, if tenants leave the unit, the real estate investor will have to worry about covering the investment property fees and the mortgage payments as well as any fees for finding tenants. There will be no cash flow from rental income to cover any of these expenses.
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Single Family vs. Multi Family Rentals: Investment Property Financing
Single family homes are the more affordable investment properties. Beginner real estate investors who are looking for ways to invest with less money might want to consider this type of investment property. There are more mortgage lenders offering investment property financing for single family homes for sale in any given real estate market as well.
Related: Why Single Family Homes are The Best Rental Properties
With multi family rentals, the size will dictate what kind of investment property financing a real estate investor can qualify for. If the investment property has 4 housing units or less, it will qualify for the same mortgage loan as single family rentals: a residential real estate loan. If the investment property has 5 or more housing units, the real estate investor will have to apply for a commercial real estate loan.
Not only are multi family rentals the more expensive investment properties, but also financing them is a bit more difficult. While some mortgage lenders see multi family rentals as low risk real estate investments because of the high rental income and the low chance for 100% vacancy rate, others put more restrictions on the underwriting process of the loan. For a commercial real estate loan, lenders will want to see your real estate investing track record and review any experience you have with rental property management. They may even require a higher down payment of 25%, compared to 20% for a residential real estate loan.
There is one positive aspect of investment property financing for multi family rentals. If you are buying multi family real estate that qualifies for a residential real estate loan, you can apply for an FHA loan. With this loan, you’ll have to live in one of the housing units and rent out the others. Of course, this is a good real estate investment strategy anyway, as you save on rent or a second mortgage. The best part? The FHA loan usually requires only 3.5% down payment.
Single Family vs. Multi Family Rentals: Real Estate Appreciation
When it comes to real estate appreciation that occurs over time, both multi family rentals and single family rentals will benefit the real estate investor in this way. However, where they differ is in forced real estate appreciation. With a single family home, every time you make repairs on the investment property, you’re forcing real estate appreciation on one housing unit. With multi family rentals, a repair on the building or any common areas forces real estate appreciation collectively on all of the housing units.
This is even more important to take into consideration when comparing multiple single family investment properties to a multi family rental. Forcing appreciation on each and every one of the single family homes would be costly: imagine fixing 5 roofs compared to one on a multi family investment property.
Single Family vs. Multi Family Rentals: Rental Property Management
Rental property management is no easy task when it comes to real estate investing. However, with just one single family real estate property, rental property management can be made a bit easier. This is due to there being fewer tenants and only one housing unit to maintain.
But what about professional property management? Many times, when a real estate investor owns one single family home, it isn’t financially viable to hire professional property management, so a real estate investor has to take on the responsibilities him/herself. If you do opt for professional property management, know it will be costly relative to that of multi family rentals. Most real estate investors find themselves paying 10% or more of the rental income when it comes to professional property management of single family real estate properties.
With multi family rentals, rental property management can be a bit of a hassle for a real estate investor without experience or time. This involves multiple tenants to attend to as well as all kinds of issues with different units to handle. While it’s not impossible to manage, it can be difficult at first. Luckily, the extra rental income from multi family units makes professional property management affordable. A professional property manager will often charge 4-7% when it comes to a multi family home.
Single Family vs. Multi Family Rentals: Growing Your Investment Portfolio
Because single family homes are the more affordable investment properties, it’s easier to expand your investment portfolio with multiple single family homes rather than many multi family homes.
Of course, as you advance in your real estate investing career, a diversified investment portfolio will become more important for generating more income and minimizing risk. In this case, you’ll want to go after both kinds of investments.
To start looking for and analyzing the best investment properties in your city and neighborhood of choice, click here.
Single Family vs. Multi Family Rentals: Exit Strategies
The exit strategies for single family homes are more abundant than those for multi family homes. This is simply due to a few real estate market trends:
- More real estate investors go for single family homes, as they are seen as the “easier” real estate investment.
- The pool of buyers isn’t limited to real estate investors; when people choose to buy a home, they usually go for a single family home over, say, an apartment.
Keep these real estate market trends in mind when choosing either type of investment property and planning exit strategies.
Single Family vs. Multi Family Rentals: Real Estate Investing for Beginners
As mentioned, single family homes are considered to be the “easier” real estate investment. It is often recommended that beginner real estate investors start with single family homes. Not only is it easier to get investment property financing as a beginner with this type of investment, but it’s also a great way to learn about rental property management.
Of course, some beginner real estate investors have found success with multi family homes. It just takes a bit of knowledge. If you want to start out your real estate investing career with multi family homes (residential or commercial real estate), take a look at this guide: Learn How to Invest in Multi family Homes for Sale.
Single Family vs. Multi Family Rentals: Which Is the Right Investment for You?
Now that you have the basic knowledge about the differences between single family vs. multi family rentals, you probably know which investment strategy is right for you. It all boils down to how you answer the following questions:
- How much rental income do I hope to get every month?
- What can I afford in terms of a down payment?
- Can I handle rental property management on my own or do I need a professional?
- Am I a beginner real estate investor or looking to grow my investment portfolio?
- Do I want to buy and hold the rental property or sell it in the real estate market sooner rather than later?
Once you have answered these questions, use the information above to make a decision about what kind of investment property you wish to use to start making money in real estate. Know that, when done right, both single family rentals and multi family rentals can bring any real estate investor success.