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Real estate investors – including business leaders/entrepreneurs who could also be latest to real estate and looking to pursue latest sources of income – often struggle with the decision between investing in single-family homes or multifamily properties while allocating money for rental properties. Each of them has its benefits and disadvantages, so a number of aspects must be fastidiously considered before making a decision.
Prioritize goals
First of all, clearly define and prioritize your goals when it comes to investing. If maximizing ROI is the most significant thing, take a look at what type of property has the biggest potential to generate rental income and recognition. Multi-unit properties generally perform higher here, providing them with a higher return on their investment in the short term. However, single-family homes may appreciate more in some markets, which could provide higher returns in the long run.
If your major priority is maintaining or increasing money flow, a different perspective is mandatory. Both types of properties have potential here, but single-family homes are characterised by more reliable growth and since 2010, their rents have steadily increased by around 3%.. They also tend to attract families preferring longer lease terms, which result in more consistent money flow.
However, multifamily properties offer the opportunity to spread expenses reminiscent of property management, maintenance and utilities, leading to lower unit operating costs.
Rate your experience level
Your experience as an investor and landlord plays a significant role in selecting the type of property that can present higher opportunities. For beginners, it might be higher to look for smaller properties because a multifamily property involves charging different rents and maintaining multiple units, which suggests higher communication with tenants. That said, those latest to the process mustn’t discount smaller multifamily homes (reminiscent of semi-detached houses and triplexes), which could also be easier to afford and manage than larger buildings.
Average single-family homes require a lower initial investment, making them more accessible to inexperienced investors and/or those that have or prefer to invest less capital. Besides, they have a tendency attract more financially stable and long-term tenants, which is able to make it easier to collect rent. Duplexes and triplexes provide the best of each worlds: they permit less experienced investors to access multifamily properties at a lower entry point, with the profit of collecting rent on more than one unit. They may even live in one while renting the other.
It’s no surprise that more experienced people are higher at navigating the complexities of larger real estate investments. In many cases, multifamily properties command a higher price money refunds. And, depending on the market, Rent is often lower for multi-family homes than for single-family homes, because collecting from multiple units provides a higher monthly rent. More experienced investors are also higher equipped to deal with the higher costs (and more difficult barriers) of purchases of this scale, including obtaining commercial loan and compliance with additional regulations.
Consider your risk tolerance
Before you commit to one type of property, assess how much risk you are willing (and can afford) to take and how comfortable you are with market volatility, tenant turnover, emptiness rates, financing and regulatory changes.
Single-family homes could also be lower risk in terms of tenant turnover because renters are more likely to be families or couples who treat the rental as their home and subsequently stay longer. That said, it is also vital to consider the possibility of long vacancies, which may create a significant financial burden until a latest tenant is found. (When a multifamily investor loses a tenant, the rent from the remaining units can offset the loss.)
Risks also exist with multifamily properties, reminiscent of market changes and structural issues. Diversifying across multiple property types and markets can spread risk, insulating investors from the pitfalls of any one property type (if one has problems, others can offset it).
Determine scalability
If you want to have the opportunity to grow your real estate portfolio over time, investing in multifamily buildings may be a good strategy, especially if you make the most of economies of scale. (As the number of homes increases, so does the potential for cost savings and income generation). These can often be higher deals – offering savings on utilities and wholesale prices on materials and services for maintenance repairs and home improvement projects, in addition to prices on appliances and housewares. Additionally, managing multiple units inside a single property simplifies tasks reminiscent of communicating with tenants, scheduling maintenance, and collecting rent.
Such properties may attract more favorable financing options. Due to the potential for higher rental income and lower emptiness risk, some lenders may offer higher deals on rates of interest and loan terms, reducing the cost of capital needed to scale, and may provide tax benefits. Moreover, the purchase of an apartment building with 20 units requires only one due diligence and closing of the transaction.
Single-family investments also have benefits related to scalability. Lower entry points in prices, flexibility of mortgage loan options and minimal out-of-pocket expenses make it easier to strategically expand the portfolio, especially for those with less capital. Additionally, it allows for gradual expansion: by purchasing properties one at a time, investors have the freedom to develop at a more comfortable pace while waiting for appropriate opportunities to arise or for their financial situation to improve. By taking a more gradual approach, they’ll avoid the need for large capital injections and complex financing structures.
Assess the time commitment
Managing rental properties can take a lot of time, so it is vital to resolve in advance how many hours you have (or want) to devote. If the goal is minimal involvement, a single-family home could also be a good option.
Managing two or more units obviously takes more time and effort unless you hire a property management company (which increases operating costs). However, it is still possible to invest in multifamily properties without having to incur the costs of outsourcing tasks reminiscent of resident screening, payment collection, and repairs. Management technologies are available that may streamline and automate most of these activities – providing greater flexibility and resources needed to diversify your portfolio, while maintaining a relatively low time commitment.
These technologies may also open the door to self-discovery, further expanding your rental investment options. Putting all the pieces from listings and tenant screening to signing leases and collecting rent essentially on autopilot (controlled via a mobile app or other platform) can allow you to manage from virtually anywhere. Such apps may also offer advanced features reminiscent of maintenance management, tenant credit enhancement, renter insurance, and accounting.