Many people eager to become real estate investors often start with what they know, and this is single-family homes. These are properties that house one family and are usually in a form of a townhouse, or a detached house. This is usually the most obvious choice to buy since the investor almost already owns their home. Though this may be a good start, most people quickly realize that long-term wealth building lies in multi-family properties. Multi-family homes are homes which are designed for more than one family. These homes may include “suites” or may be divided into several “apartments” for different families or separate areas for different tenants. However, both single-family homes and multi-family homes have their advantages and disadvantages. Let us look at some of them below to understand the differences between the two.
Single Family Homes – Pros
• Generally, single-family homes appreciate faster than multi-family homes.
• Traditional financing rates are more competitive.
• There is a larger pool of sellers/buyers of you can buy/sell quickly.
• No common walls or areas are shared which reduces tenant conflicts.
• Ease of purchase equity given the number of foreclosures on market.
• Single utility meters so all tenants pay for all utilities.
• Better quality tenants.
Single Family Homes – Cons
• Generally, cash on cash return with single-family homes is not as high as multi-family homes.
• Property management rates may be higher due to economies of scale.
• If you lose a tenant you don’t have other units bringing you rent.
Multi-Family Homes – Pros
• Higher cash on cash returns as the price per door tends to be lower.
• Financing is usually tied to the property financial performance rather than the buyer’s financials.
• Property management fees are lower as all units are consolidated.
• Generally, rents are less and this expands your renter pool.
• Loss of a tenant has a minimum impact as other units are bringing in rent.
Multi-Family Homes- Cons
• More tenant issues since common areas and walls are shared.
• Additional maintenance costs for pools and common areas.
• Appreciation is more tied to the rents than the market.
• Generally appreciate slower than single-family homes.
• Tenant placement may tend to cost more.
• Additional costs and management for units that don’t have separate utility meters.
• Tenants don’t stay as long as in single-family homes so you’ll have more turnover and make-ready costs.
• Commercial financing rates tend to higher and may be more of a challenge to get.
As you can see both single-family homes and multi-family homes have their advantages and disadvantages. If you want a low barrier to entry, higher appreciation, easy of an exit strategy, and better financing, then you may want to consider single-family homes. If you’re looking for economies of scale and higher cash on cash returns you may want to consider multi-family homes.
Basically, many new investors start with single-family homes due to the ease of financing and plenty of deals on the market. However, no matter which option you go with you can’t go wrong. Real estate is a great vehicle to build wealth and generate more income.
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