Multifamily vs. Single-family Investing
Real estate investing can be one of the most lucrative ways to build wealth and establish financial security.
However, a new real estate investor often struggles to decide where to start. They're not sure about what they should buy or where to look for investment opportunities. If you're new to investing in rental properties, it's easy to wonder what the best asset class is for your portfolio.
Do you want to invest in single-family properties or multi-family rentals?
Today, we're discussing the challenges and benefits of each category. At Mynd Management, we work with investors at every level. Some of the rental property owners we help are preparing to buy their first investment property. Others have a growing portfolio of successful investment homes.
Our experience has given us a unique perspective on what you should do and where you should buy when deciding on the right acquisition.
But First, Know Your Goals and Your Market
With all residential real estate investing, you need to start with your own goals and your vision for where owning rental property will take you.
Why are you investing?
This question has to be answered thoroughly before you choose a specific investment property. If you're looking for cash flow, the path you take will be much different than if you're looking for equity or appreciation.
Perhaps you want a combination of cash flow and appreciation, which is ultimately what strong cash on cash return becomes.
If you aren't clear on your investment goals, no one is going to be able to steer you in the right direction when it comes to choosing between single-family homes or multi-family units.
So, before you go shopping for your first rental property or even your seventh or eighth rental property, make sure you've established and reviewed your priorities and your investment goals. One of the biggest mistakes new investors make is buying the wrong property. Enter the market as an educated investor!
Know the Inventory of Multifamily Real Estate Properties vs. Single-Family Properties
Speaking of education, make sure you know your market.
Before you invest, you'll need to know what the inventory looks like, where you're investing, and which properties offer the best opportunities.
You'll want to know:
- Where rental values are
- How long it's taking to rent a property
- What the tenant pool looks like
Get to know your local rental market and your local sales market if you want to choose the best properties and decide on the right asset class.
What are the Benefits of Single-Family Investment Homes?
Single-family homes (SFH) can be an excellent real estate investment, particularly in markets where there is a high demand for houses or where you can get below-market rates when you're buying these homes.
1. Opportunity to Buy Below the Market
Acquiring a single-family property that's below the market is an outstanding opportunity for many investors, even if they have diverse investment goals. Maybe you'll find an owner who is selling a property because he or she is leaving the area or is already under contract for another home that's been purchased.
When you buy a single-family home at a price below the market, you start with equity already. This is going to lead to a pretty great cash on cash return. Look for these opportunities in your local market. You'll need to act quickly.
2. Easier to Buy and Qualify for a Mortgage
Another benefit of investing in single-family properties is that there are multiple ways to finance this property type, particularly for first-time investors. You will likely qualify for a conventional mortgage, and there's a lower down payment on those through banks, credit unions, and other traditional lenders. So your initial investment may be a bit lower than it would be with different types of properties. This also helps if you’re practicing the buy, rehab, rent, refinance, repeat (BRRRR) method to guide your investment strategy.
3. Single-Family Homes Can Be More Attractive to Tenants
Depending on your market, single-family homes are often more attractive to tenants. Suppose you're in a suburban market where qualified residents will want an established neighborhood with good schools and amenities. In that case, a single-family home can provide what they're looking for. Tenants will be attracted to yard space, garage parking, and extra square footage.
4. Single-Family Homes Resell Favorably
The sales market also looks at single-family homes favorably. You can expect a good return at the end of your investment period because there's usually a higher demand in the sales market for single-family homes.
You can expect to sell faster and for more money because there's a larger pool of potential buyers. You'll have investors interested in buying the home as well as buyers who would be owner-occupants.
What are the Benefits of Investing in Multifamily Properties?
When it comes to investing in real estate, it's not all about single-family homes.
Multifamily rental properties can also be great investments, and they come with several advantages that single-family homes cannot provide.
1. Multiple Tenants Leads to Higher Cash Flow
For starters, there are multiple units and multiple tenants. So, you have a higher cash flow because more than one rent check is coming in every month.
If you have a tenant who pays late, you aren't completely without rental funds. And, if you find yourself with a vacancy, you still have rental income from your other units to cover your expenses.
We have seen some owners who buy multifamily housing and live in one unit. This virtually eliminates any kind of living expenses because your tenants are paying your mortgage and your bills. It's a nice situation if it fits your investment goals and your personal housing needs.
2. Economies of Scale for Maintenance and Expenses
Rental property owners who have multifamily property and units are also able to access some significant economies of scale. This will be especially helpful with repairs and maintenance expenses, and there will be multiple benefits.
First, when you need repairs, you'll be able to negotiate lower rates with vendors and contractors.
Suppose they know you have multiple properties, all of which will eventually need plumbing or electrical work or cleaning during rental property turnovers. In that case, you're going to get a pretty good discount.
You can also plan to have work done on more than one unit at a time. This will save you money on mileage and trip charges when those things are included in your maintenance bills.
3. Insurance and Marketings Costs Tend to be Lower
Your cost for insurance and marketing are lower per unit than they would be with a single-family home. Overall, you'll pay less for these things because the cost is spread out among several properties instead of just one.
4. Easier Financing Through a Commercial Mortgage
There's also a financing benefit to investing in a multi-family property. You might find that it's easier to get financed because, with this type of property, you have to use a commercial mortgage instead of a traditional mortgage or an investment loan, which you'd use for a single-family home. Much of this will depend on:
- the amount of a down payment you'd like to make
- the strength of your credit history
- any other assets you might have
It also depends on where you're going to finance your purchase. But, many investors have an easier time navigating the lending process when they buy a multi-family property. In some cases, the expected rental revenue will help you negotiate better terms.
5. Lower Property Management Fees
A final benefit to buying a multifamily home is that your professional management fees will likely be lower.
Single-Family Home Management Fees
When you buy a single-family home, your management fees are probably going to be in the range of eight to 10 percent of your rental income every month.
The exact amount will depend on where you are and which property management company you choose. However, that range is pretty standard around the country.
Multi-Family Property Management Fees
You can usually negotiate a lower management rate with multifamily investing because you're handing over several properties to be professionally managed.
Usually, you can expect to pay between five and seven percent of rental income per unit. This will add up to a lot of savings.
Considerations for Both Multifamily Units and Single-Family Homes
You’ll have to consider certain things and tasks you’ll have to perform for both types of properties.
- Confirm That Your Mortgage Allows You to Rent Your Property
- Have an Emergency Fund
- Consider a Property Management Company
- Perform Maintenance Between Tenants
- Consider a Partial Vacation Rental
- Consider a Live-In Flip
- Make Sure You Avoid Commingling Funds Illegally
- Choose the Right Legal Entity
- Set up Online Rent Collection
- Write Explicit Lease Agreements
Surprising Landlord Liabilities
You’ll want to keep in mind the sorts of issues that can get you sued. Landlord liabilities are often easily preventable so long as you know what they are.
- Criminal Activity
- Windows and Screens
- Secondhand Smoke
- Bed Bugs
- Slips and Falls
- Harm Caused by Employees
- Running a business out of a rental property
- Emotional Support and Service Animals
Gestures to Encourage Lease Renewals and Reduce Tenant Turnovers
- Be Professional and Friendly
- Provide a Welcome Letter and a Gift Basket to Your Neighborhood Hardware or Home Goods Store
- Have Tenant Appreciation Events
- Send a Card or Small Gift on Tenant Birthdays and Significant Anniversaries
- Before a Major Holiday, Give a Gift Certificate to a Neighborhood Supermarket
- Give a Small Rent Cut or Gift after a Streak of On-Time Rent Payments
- Upgrade an Old Appliance
- Make Repairs ASAP
- Respect Tenant Privacy
- Ask Tenants for Input
- Provide Unit Cleanings for Long-Term Residents
- Make Rent Increases with Consideration
Early Lease Terminations
There are several common reasons for early lease terminations, some of which are caused by the tenant’s unexpected life events. Others are due to infractions on the part of the landlord or their representatives.
- Active Military Duty
- Breaking a Month-to-Month Lease
- Domestic Violence
- Loss of Employment
- Intrusion of Privacy by Landlord
- Lease Agreement Violations
- Uninhabitable Rental Property
There are many different tax deductions to make use of:
- 1031 Exchanges and Section 121 Exclusions
- 100% Bonus Depreciation and Section 179 Write-Offs
- 20% Qualified Business Income Deduction
Final Thoughts on Multifamily vs. Single Family Investing
With real estate investing, there is rarely a one-size-fits-all strategy. This is why it’s so important to know your market and what you’re comfortable with when it comes to financing and being a landlord.
The most important thing you can do as a new investor who is deciding between single-family and multifamily properties is to surround yourself with smart people who you trust. Investing is not something you need to do on your own.
If you can find a broker who knows the details of both the sales and the rental market in your local area and a property manager who understands rental values and the local tenant pool, you can make an informed decision about what and where to buy.
The decision you need to make is a personal one. There’s always money to be made whether you decide to invest in single-family homes, multifamily properties, or a combination of asset classes. The best way to ensure you meet and maintain your investment goals is by knowing what they are and making strategic and intentional choices that will lead you closer to what you hope to accomplish.
At Mynd Property Management, we love working with new investors and talking through investment options and financial goals. You can rely on our experience in your market and our expertise in the property management industry to help you identify the best type of property to buy and rent out.
Contact us at Mynd Property Management and let us know what you want to achieve.
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