Considerations of Single Family Versus Multifamily Investing
While most commercial real estate investors focus primarily on larger properties, it is worth considering the appeal of single family homes versus multifamily units. The management styles, income, risk and exit strategies are very different from one another. These properties are viewed quite differently from different stakeholders, such as investors, insurers, lenders and understanding the ins and outs of these different types is an important distinction for success.
For investors considering either type of these properties, it is important to learn the distinction between the two.
Multifamily Investing
A multifamily structure, which is also referred to as an apartment building or multi-dwelling unit (MDU), is a type of housing structure with two or more units in one building. These types of structures range from duplexes to garden complexes, to low-rise apartments to large high-rises in metropolitan areas. Each unit is comprised of its own living space and the property can include amenities such as ample parking, green spaces, a gym, pool and other features.
Multi-family properties are a popular type of commercial real estate investment due to their monthly income and steady appreciation. Owning a multi-family property include the following benefits:
- Larger Income – A multi-family investment provides multiple forms of monthly income due the larger number of tenants in one property. Smaller real estate investors can even choose to live in one of the units and rent out the rest for income.
- Increased Control Over Value – All real estate investments increase in value with larger amounts of income. Since multi-family properties receive larger amounts of income, they are typically valued higher than other types of real estate investments (in this case single family homes).
- Greater Amount of Tenants – Multi-family structures have less risk to investors as there are a greater number of tenants. If there are a few tenant vacancies, the economic loss is lower than with other types of properties due to the larger number of tenants and higher income to offset them.
- Increased Scale – Instead of purchasing one property at time and slowly increasing business operations, investors can effectively purchase multiple properties within one structure. This scalability is attractive to investors and existing buildings can be used as collateral for financing their next purchase.
In addition to the ability to generate higher income than a single family home, multi-family properties are ideal for real estate investors interested in growing their business while reducing risks.
Single Family Investing
A single family home is a free standing residence built on a single lot. It does not contain any shared walls and only has one unit. They typically contain a front yard, back yard and a garage. While typically used as an owner occupied property, single family homes can also be used as a real estate investment to generate income. These properties provide some advantages over multi-family buildings, primarily for newer real estate investors. These benefits include:
- Less Expensive – The primary advantage of investing in single family homes is the cost. They are much more affordable than multi-family properties. The down payments and maintenance costs are much lower on single family homes. The rental agreements for these types of properties typically require the tenant to pay for utilities, landscaping and other items which helps lower the expenses for investors.
- Greater Appreciation – Single family homes often appreciate more than other types of properties. While multi-family properties are valued on the amount of income they generate, single family homes a valued based on supply and demand.
- Lower Barrier to Finance – Financing a single family home is much easier to accomplish than with a multi-family property. The lending requirements, lower interest rates and higher loan to value ratios enable easy financing for these properties.
It’s clear that multi-family homes are the ideal choice for real estate investors. They provide higher incomes with overall lower risk. Investors who are just getting started in real estate should consider single family homes.
