How do single-family properties stand up to multifamily properties as a real estate investment? You must compare a few factors to decide.
Whether you’re thinking about it, just beginning your career in real estate investing, or have been doing it a while, you may be wondering which type of property best fits your plan. Is it single family properties or multifamily properties? The answer centers around your long-term plan and your current financial situation.
Here, I will cover the various aspects of both of these types of properties so you can decide for yourself which type of investments fits your goals best.
Cost of Single Family Homes vs Multifamily Properties
Some investors think that single family rental properties are attractive because of their low purchase price compared to multifamily properties. The lower cost of single family properties makes it easier for someone to get started and to continue purchasing more properties.
However, the cost per unit is typically actually higher for single-family than multifamily investments.
Depending on their size, multifamily properties can get quite expensive. The higher cost of multifamily properties compared to single-family homes makes it difficult for many investors to invest in these types properties.
When you consider the cost per unit, however, multifamily properties typically come out lower. In most cases, the lower cost of each unit can provide the investor with a much higher return.
Larger multifamily properties are often too expensive for a new investor. Smaller multifamily properties (2-4 units) can provide a real estate investor with a great opportunity to get started with a multifamily purchase. In many cases, a two- or three-unit property may not cost much more than a single-family rental.
Managing the Property
It takes a lot more to be successful in real estate than simply making the right purchase. Property management plays a major role in the success of the investment.
On a per-unit basis, multifamily properties are usually easier to manage. Multiple tenants share the same roof and many of the mechanical items.
If you have an eight-unit property, you only have to replace one roof, mow one lawn, and visit one property. By comparison, with eight single family properties, you have eight roofs to replace, eight lawns to mow, and eight properties to visit.
In most cases, you will find that the property manager’s fee will be less with multifamily than with single family rental. This is mainly for the same reasons I mentioned above.
However, while multifamily properties might be simpler to manage, many investors find that they have better tenants in their single family rentals. Tenants in a single family property tend to be longer-term tenants who generally take better care of the property.
Financing For Single Family vs Multifamily Properties
Almost every bank offers single family real estate mortgages and the process for obtaining them is rather straight forward. With many options available, it’s often much easier to get a mortgage loan on a residential real estate property.
Multifamily properties are considered commercial, requiring a different type of loan with a different underwriting process. Since it’s a commercial loan, there are fewer banks offering loans for multifamily properties, and these loans can be difficult for new investors to obtain until they have more experience with investment properties.
That being said, banks tend to be more competitive with interest rates with larger deals. Lower interest rates can make a multifamily property an attractive investment.
Property Value
One major difference between single family and multifamily properties is how they are valued. No matter what the income is on a single family home, they are always valued based on the comparable sales of other homes in the area. Rental income normally doesn't play much of a role in the value of a single family rental.
The value of any multifamily property is typically determined by the cash flow it generates. The market determines an expected rate of return on a multifamily property, which will determine the property's value.
One common method of determining the value of a multifamily property is using the capitalization rate, commonly referred to as the “cap rate”. Simply put, a cap rate is the ratio between the net operating income the property produces and the original capital cost or alternatively the current market value of the property.
For example, if a property cost $1,000,000 and it generated a net profit of $100,000 per year, the cap rate would be ten percent. Ten percent of $1,000,000 is $100,000.
Using that same property and the same net profit of $100,000, we can plug in different terms. If the expected cap rate in a market is eight percent, the property’s value would then be higher: $1,250,000. The equation is $100,000 / .08 = $1,250,000.
Net Operating Income (NOI) / Cap Rate = Property Value.
The value of multifamily properties aren't impacted as much during downturns in the real estate market. Since they’re mostly appraised based on income, the property value stays relatively stable. In fact, multifamily properties tend to do even better when the housing market is suffering. Less people will purchase homes and most tenants stay where they are. These properties always produce income which makes them attractive to investors during any market condition.
Growing Your Real Estate Portfolio
The goal of investing in single family homes and multifamily properties is the same. The goal is to make money and growing wealth. Growing your real estate investment portfolio is important with whatever type of property you invest in.
Multifamily properties may grow your portfolio much more quickly than single family rental properties. Every multifamily property you purchase increases the total number of units at a much faster rate than with single family rentals.
With the economies of scale, the more units you own, the more profitable each one becomes. When you grow your portfolio with multiple units at a time, your cash flow increases at a much higher rate.
Exit Strategies
If you plan to cash out on your investments one day, you're going to have to find qualified investor to purchase them. There are plenty of real estate investors that are interested in buying multifamily properties as well as investors that will buy single family rentals.
A large portfolio of single family rental properties can be difficult to sell. Most investors capable of purchasing a large portfolio of homes are most likely investing their money into multifamily investments. This would leave you trying to sell your properties off in smaller chunks or one at a time.
Multifamily properties are always in high demand. When it comes time to sell, you are likely to find many investors ready to write you an offer. These buyers are typically sophisticated and capable of closing transactions easily.
The Bottom Line
There are many other factors to consider when deciding on a single family vs multifamily investment. In my book, I address this issue and a whole lot more. After reading it, I know you will have a much better perspective of what investment is best for you.
Order your copy of Create Wealth With Multifamily Real Estate Investing now by clicking the link below.
