Real estate investing can be one of the most lucrative ways to build wealth and establish financial security. However, new investors often struggle to decide where to start. They’re not sure about what they should buy or where they should look for impressive 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 multifamily rentals?
Today, we’re discussing what the challenges and benefits are to each category. At Mynd Property 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 you’re 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 multifamily 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.
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 are offering the best opportunities. You’ll want to know where rental values are, how long it’s taking to rent a property, and 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.
The Benefits of Single-Family Investment Homes
Single-family homes can be great investments, 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. Acquiring a single-family property that’s below 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 that’s below market, you start with equity already. This is going to lead to pretty great cash on cash return. Look for these opportunities in your local market. You’ll need to act quickly.
Another benefit of investing in single-family properties is that it’s often easier to buy this type of property, 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 other types of properties.
Depending on your market, single-family homes are often more attractive to tenants. If you’re in a suburban market where qualified residents are going to want an established neighborhood with good schools and amenities, a single-family home can provide what they’re looking for. Tenants will be attracted to yard space, garage parking, and extra square footage.
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.
Multifamily Properties Have Benefits Too
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 a number of advantages that single-family homes cannot provide.
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 buildings 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.
Rental property owners who have multifamily buildings and units are also able to access some great 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. If they know you have multiple properties, all of which will eventually need plumbing or electrical work or cleaning during turnovers, you’re going to get a pretty good discount. You can also plan to have work done at 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.
Also, 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.
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, and 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.
A final benefit to buying multifamily properties is that your professional management fees will likely be lower. 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 obviously depend on where you are and which property management company you choose. However, that range is pretty standard around the country. With multifamily properties, you can usually negotiate a lower management rate 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.
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.