Regardless if you plan to go it alone, syndicate deals, or investing in a crowdfunding platform, you’ll ultimately ask yourself – “is single-family or multifamily better?”.
There are some significant differences between the two and each has it’s own pros and cons.
Single family is what most people think about when they think about investing. But, after a bit of research they discover multifamily, which seems super lucrative.
So, which is best?
Questions to Ask Yourself About Single Family vs Multifamily
Everyone has their preference and any list will most likely be biased by the person writing it. So, it’s important to decide for yourself which investment is good for you. First, you need to ask a few questions.
1. Do I Want Partners or Not?
A multi-family property will cost a lot more than most single family homes. As such, it will require a much greater down payment and you might not have the capital to make the purchase.
Additionally, the loan qualification criteria can be different if you are trying to buy a multifamily instead of a single family.
As such, you will almost definitely need partners to close on a larger multifamily property. You can structure it as a real estate syndication or you can get involved in a crowdfunding platform.
Single-family homes are a lot simpler to buy and run. You are far more likely to get a loan from the bank along standard paths if you have a decent income and manageable debts.
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When buying multifamily deals, you will need a team of people – from experienced investors to partner with, you commercial lenders, brokers, insurance agents etc.
As you can see, multifamily requires a lot of people and partners. If you really want to do everything yourself, then single family is the way to go. If you want to work with a team and have everyone’s experience play a part in getting the deal done, then multifamily might be your choice.
2. How Soon Do You Want a Return on Your Investment?
Get out a pen and paper. Calculate the down payment, the mortgage payments per month, and the rental income that you are being advised to charge based on the neighborhood and the condition of the property.
Also, you will need to budget for capital improvements, maintenance, vacancy etc.
Now, take some sample properties and plug them into the calculator. Try to get a few single family homes and a few multifamily to get a fair sample.
You’ll probably start to notice a trend between the two. In general, single-family properties have a lot lower cash-flow than multifamily, but there is often a lot of potential appreciation.
Regardless if that holds true in your particular market, look at the results on both and decide what sort of return you want. If you want a high, stable cash-flow, then multifamily is probably the best option. If you aren’t interested in cash-flow, then single-family properties may be the better choice for you.
3. Who Will Manage and Maintain the Property?
Picking a property manager is a daunting task. It’s so difficult, that many owners will choose to manage the properties themselves.
Often, your available free time will dictate what you do. If you have a lot of free time, you’ll probably end up saving the money and doing the work yourself.
If you are very busy or just aren’t very handy around the house, you’ll definitely want to take the dive and get a management company.
But, with multifamily, you’ll probably want to bite the bullet and just get management. Overseeing a dozen units is completely different than a single-family house that you know every nook and cranny of.
You also need to consider if you want random calls for emergencies, such as arguments, loud music, water leaks, etc.
However, a single-family home might have small problems which you can fix yourself after you get home from work. That is a nice, easy option which will both cost less and will bond you and tenants together, further reducing their likelihood of moving out. Happy tenants equal more secure income.
4. Have You Thought About Insurance on Both?
Buying insurance for a home is often a lot cheaper than insuring a commercial property. There are a lot more considerations when insurance agents write policies for them.
This is because a multifamily property is considered a business, and there are all kinds of business riders and requirements you’ll need to consider.
While a single-family residence may also require a policy for landlords, it is a far cry from what is required for typical multifamily properties.
5. What is Your Comfort Level with Risk?
The last question you need to ask yourself is how comfortable you are with risk.
This question will determine whether you will feel more comfortable accepting higher risk and working with investment partners to acquire and rent out a multi-family property or if you would feel good renting out an easy-to-care-for single-family home.
Your comfort level with (and time for) property maintenance is also important.
Do you want to do the maintenance and repair work yourself? Or, perhaps you will hire a property management group to do the work for you. Be sure to factor in the monthly cost of their services when calculating your net income.
A professional property management company will take care of all the headaches for you. While a tenant still might leave the palce in tatters, the property manager will make it pristine before listing it on the market for you.
Of course, you’ll pay for this, but you won’t have to worry about the headaches.
6. What Sort of Cash Flow are You Looking For?
Multifamily most definitely cash-flows better than single-family. The demand for single-family determines it’s price. Cash flow determines the price of a Multifamily property.
So, determine what sort of cash on cash return you are looking for, then decide what fits you better.
If you are looking for a high and stable cash-flow, you should go for multifamily property. If you are looking to just cover your costs and have something very passively creating value over years, then single-family might be a better option for you.
So, Which is Better?
Both single-family and multi-family homes are great investments. You should feel completely comfortable with and confident in your final decision, regardless of which you choose.
Explore these topics further and calculate the cost and return on rent down to the last penny. This kind of careful attention to detail is what will, in the end, make you very successful in the real estate investing game.