If you are looking to invest in real estate, you may be thinking about buying a single family or a multifamily property. Single family properties typically are fixed up and flipped. Some will rent them out long term or even do Airbnb’s. Multifamily is consisted of multiple doors. For example a duplex, triplex or quadruplex. The multifamily are typically used as rentals not so much for flips. Multifamily can also be use for short term rentals. As a matter-of-fact, if you purchase a 2 or 3 door property you have an instant portfolio.
Single Family vs Multifamily
The Positives of Single Family ownership
Owning a single family home can be a more affordable option, it can be easier to finance, and you can be more selective about your tenants. Let’s go into it with more detail below.
Less expensive to purchase
There is a larger selection of single family homes to buy into. The properties are typically less expensive as well as it is only one unit.
You can be more selective with your tenant pool
Only having 1 property to fill versus many allows you to really qualify your prospects. If you have a 5 unit building, you would typically have more leniency in order to avoid vacancies.
Much less turnover with a single family home
Only having to rent one unit versus three is a much easier task. A typical tenancy is 12 months. If you decided to do short term rentals on a house for example with one month minimum stays, you would be responsible to fill it 12 times a year. If you had a 3 unit property, you would have 36 times a year to fill it potentially. This translates into much less time spending finding tenants if you own a single family home.
Easier to sell
Selling a single family home from your portfolio is can be easier than multifamily depending on the location of course. Eastern located multifamily can be sought agger as well, but less of a pool of Buyers. There is always a demand for single family homes. From first time home buyers, to investors, there is a bigger pool of Buyers. Selling a multifamily property will have different challenges, from a smaller Buyer pool, difficulty showing the occupied property and insurance issues to age and condition of property.
Easier financing options
Buying a single family house is typically easier. Mortgages currently for single family homes require a minimum of 3% down with Buyers typically doing 5%, 10%, and 20% options. That is not including VA loans. Duplexes will require 15% down and triplexes and quads will require a minimum of 25% down. That’s a very stark contrast from single family financing. The only way to get a lower down percentage aside from using a VA loan on a multifamily, is to purchase it as a property that you would live in. A FHA 3.5% down payment loan is what we are speaking of. You can see that the single family home purchase can require a lot less of a down payment.
Much less maintenance
There is much less maintenance with a single family home than a multifamily property. There is only one tenant and one set of appliances versus dealing with 3 tenants on a triplex, and 3 of everything.
The negatives of single family investing
Less cash flow with single family homes.
There is much less cash flow with a single family home, there is only one tenant to collect cash flow on, and there are real monthly costs that need to be covered such as mortgage, taxes, insurance and maintenance. With multifamily there is a much larger stream of income coming in that can offset vacancies.
Vacancies are costly
Only one income stream can be costly if there are vacancies. With multifamily for example, on a triplex, if two of the three units are providing cash flow there is a good chance your carrying costs are still being covered even with one vacancy versus a single house being empty you will in the red instantly.
More challenging to scale
Trying to grow a portfolio of single family properties is much harder than purchasing a multifamily property. If you purchased a triplex you would instantly have three units versus one if you bought a house. You have to go through the process 3 times to gain the same about of units if you purchased a triplex.
The Positives of Multifamily Investing
Jumping into multifamily investing gives you an instant portfolio. The instant multiple streams of cash flow are great, but it will come with added work. Buying in bulk always gets you a better deal. Purchasing a 3 unit will give you a lower cost per unit than buying individually, and that also counts for closings costs, commissions and much more – ultimately you save when buying in bulk.
More cashflow and more leverage
The more cashflow you have the better the cushion. If you have repairs you will be able to handle it better because of the reserves you have from the income stream on a multi. The more cashflow you have the better you can sustain vacancies and errors. Also with a good rent toll and proven income on the property it can put you into better position for leverage on your next purchase.
Better property appreciation
When you have multiple units you can increase appreciation faster. By increasing the quality of all the units it will force appreciation throughout the building. Also as the quality of the property increases the rents will go up. When looking at the income approach, if the rents increase then the cap rate increases which results in a higher value of the sales price.
Tax Shelter
Multifamily property gives you the ability to write off more as you now have multiple units instead of one. You can spread your repairs and upgrades over multiple units.
The Negatives of Multifamily Investing
Keeping units filled is critical, being very selectively is challenging with multifamily. Leniency is key to consistent cash flows, especially if you do short term rentals.
DIfficulty with Financing
Multifamily properties typically require more down payment starting at a minimum of 15-25% as an investor. If it’s five or more units the down payment can be as much as 30% typically.
Relying on others more often
Depending on how many units you purchase you may need to have a crew of workers to rely on for maintenance. If you are a handy person and only have 2-3 units it’s not that challenging. However, once you get into the bigger properties you may need to source a property manager.
At the end of the day investing in real estate is a great way to build wealth over time. You may decide to try both styles of property and see what you like better. Or perhaps you buy certain types of properties in certain areas that make the most financial sense. Reach out to me at 954-610-0440 and I can explain to you the pros and cons, and location selections for specific property type that makes the most financial sense. I consider myself to be a Real Estate Advisor. I have hundred of transactions underneath my belt and I am an owner of a triplex in Fort Lauderdale. I do shorter term furnished rentals and my experience is very helpful for investor alike.
