Single Family vs Multi Family Homes
Single Family vs Multi Family Rental Properties
Investing in rental properties can bring a nice return on investment (ROI), especially if you approach it with the proper know-how and strategies. Learning from the mistakes of others is one of the best ways to know how to invest and manage your properties. One question you may have is whether it is best to invest in single family vs. multi family rental properties. Let’s compare these investments.
There are similarities between the two types of investments. Both types of properties:
- have higher interest rates and require a higher down payment than buying a home as your primary residence. This is because investments are more risky for banks than a loan on a primary residence. The down payment is usually 20% since mortgage insurance is not available for investment properties. (Buy An Investment Property)
- usually have a good ROI, with single family homes coming in as high as 20% and multifamily homes at 11-15%. As a general rule, if the rent you are able to charge is 1% or more of the cost of the property, you will have a positive cash flow. To calculate your best scenario, take your yearly rental income and divide by the cost of the property. Say you charge $1,500 rent per month on a home that cost you $150,000 including closing costs. $1,500 x 12 =$18,000/$150,000 = 12% ROI. Remember that if you take out a loan, the renters will be paying the loan back for you, so you will be building equity in the home each month. You will also want to figure in all of your expenses as you consider a property.
- depreciate over time. (Depreciation of Rental Property)
- have tax benefits such as deducting mortgage interest and real estate taxes, advertising, management fees, insurance, etc. This publication on rental income and expenses from the IRS is very helpful in understanding what you can deduct.
- need to be rented and maintained by you or a rental manager to whom you pay a percentage of the rental income.
- are not subject to self-employment tax (SE Tax) which can be as high as 15.3%.
Single Family Rental Properties
Single family homes can be a great investment if you do things wisely, therefore some people feel they are a better investment. Here are some pros of renting single family vs multi family homes:
- More Affordable. Single family homes can cost less than multi family homes and apartment buildings, so even people who have less money to invest can start out with one rental property and expand from there. You can slowly build up a portfolio of rental homes over time, say adding one home per year. In addition, mortgage requirements are not as stringent on single family properties.
- Less Turnover. In general, there is less turnover with a single family home than with multi family homes. This is often due to families or couples looking to rent a single family home. Families or couples tend to pay rent more consistently than single people. Because of this, there is less time where the property is vacant. Investors also find that in general, renters of single family homes take better care of the home and property, although there are certainly exceptions to this rule. This often depends on the location and quality of the property.
- Appreciation. Single family homes almost always appreciate more than multi family homes.
- More Exit Strategy Options. If you decide to sell a single family rental property, you can sell it to another investor, a family looking to buy their own home, or lease it to the current renters on a lease-to-own basis. Buyers of multi family properties are limited to investors.
- Location. Often the location of single family homes can be more desirable than multi family homes or apartment buildings. When looking for a property to invest in, consider the location, schools, comparable rents in the area, property taxes, crime rates, the job market of the area, and how many other homes there are for rent in the area.
Multi Family Properties
Some purport that multi family homes are a better investment. There is evidence that cash flow is better with these properties, however that may be offset by the quality of tenants and high turnover. Here are some pros of investing in multi family vs single family homes:
- Financing. The government limits the number of properties that can be financed by one person. When considering multi family properties, keep in mind that those with more than four rental units are not subject to this limit. However one to four unit properties are limited.
- Cost Per Unit Is Lower. Although the up front cost is greater, when comparing the two, the cost per unit is always lower with a multi family property.
- Professional Rental Property Management Costs Less. In general paying a professional to manage your single family properties will result in 10% of the rent, whereas with multi family properties this amount is 4 to 7%.
- Vacancy Expenses Are Lower. If a single family home goes vacant you are out 100% of the rent, however with a multi family unit, there is still rent coming in from the other units if once or two go vacant.
- Less Locations to Manage and Maintain. In a multi family home all of your units are under one roof or on one property. Often mutliple repairs can be completed at the same time since the units share walls and the same property, avoiding multiple trips to the property or less cost to have maintenance companies make repairs.
Ultimately, both types of properties can be a good investment. It’s important to look at what you have to invest, how involved you want to be in the management and maintenance of the properties, how long you plan to keep the properties, how much you need to finance, and how much money you have stashed for emergencies. Both single family and multi family rental properties can set you up for steady income and early retirement if you invest wisely.