Real estate investing is one of the quickest ways to earn yourself a small fortune. Most people who are just becoming a part of this industry probably wonder whether they should start with single-family or multi-family real estate investing.
Typically, real estate investors will start with single-family rental properties, then move to multi-family real estate investing. This is because people think they can make easier and quicker cash working with one buyer or one tenant. However, this isn’t as black and white as one might think. Both types of properties have their own pros and cons, and we are here to make the difference a bit more clear. Let’s begin!
Pros of Single-Family Real Estate Investing
1. It’s cheaper
There are more single-family homes on the market, and they are significantly cheaper compared to multi-family real estate. This means that you can get better properly easily, and pay for it less. In other words, single-family properties require less starting capital, even if you’re paying in cash. Financing a single-family home is much less stressful compared to multi-family ones.
2. Fewer vacancies and less turnover
With single-family homes, you don’t have to worry about constantly having tenants move in and out of your property. This means you won’t have to waste a lot of time cleaning properties and searching for new tenants. You’ll only have one tenant at a time! At the same time, the average turnover is around 12 months. This means you’ll have less work and less wasted time.
3. You can be picky about your renters
If you own an appealing property, you’ll probably have more than one interested renter. In other words, as there’s only one place to fill, you can afford to be a bit picky about who you’ll allow inside of it. This will most likely end with you having high-quality tenants who will look after your property and stay for a long time.
4. It’s easier to sell
Cons of Single-Family Real Estate Investing
1. Less profit
Unless you own several single-family properties, you won’t earn as much cash as you would with multi-family properties. You’ll only get one (or a few) rent payments monthly, and you’ll likely spend those on your mortgage, maintenance costs and fees.
2. Vacancies are expensive
If your tenant happens to leave the property, you’ll lose much more when the building is vacant compared to a multi-family property. Even just a few months without tenants can deeply harm your business. It may even end with you being late on your mortgage, or even being forced to sell your property completely.
3. Returns are down
According to ATTOM’s reports, in more than half major counties in the US, returns on single-family rentals are down. In other words, you have to be careful when choosing the location for your single-family rental property if you want to make a real profit on it.
4. It’s harder to create a big portfolio
If your current goal is to build a big real estate investing portfolio, you will require more time to build it with just single-family homes. For example, if you want to include 15 different units in your portfolio, this will mean buying 15 different homes – which means 15 or more negotiations, 15 loan applications and 15 closings. This takes a lot of time. On the other hand, if you are doing the multi-family real estate investing, you can complete this goal with just a few purchases.
Pros of Multi-Family Real Estate Investing
1. Better Cash Flow
Having more rental units means more profit. Also, in case you end up with a vacated unit, the other tenants can ensure you have a constant cash flow. You’ll have more room to make mistakes, and if you do it right, you can profit way more compared to renting a single-family property.
2. Lower costs per unit
Buying in bulk is always cheaper, and the same is with multi-family real estate investing. Buying a property with five units will be almost incomparably cheaper comparing to purchasing five properties. This means that you can get more rental properties for less money, which means bigger returns.
3. Faster portfolio building
Buying just one multi-family property instantly means a big real estate portfolio. You’ll immediately become the owner of several units and you’ll be able to collect cash from all of them.
4. It’s easier to add value to the units
There are several ways you can increase the value of all units at just one expense. For example, if you update a common area, you have immediately increased the value of all units, not just one. The same goes if you paint the outside of the building or update the roof. This way, at the cost of one repair, you’ll end up having several more profitable apartments.
Cons of Multi-Family Real Estate Investing
1. Financing is hard
Multi-family real estate investing is much harder to finance compared to single-family homes. First off, you’ll need a commercial mortgage loan, which isn’t easy to qualify for. Also, the down payment tends to be bigger and you’ll likely require large cash reserves. At the same time, it’s harder to get this loan if you don’t have a proven track record in property management or real estate investing.
2. You can’t be picky with your tenants
When you purchase your first multi-family real estate investment, you’ll be left with several empty units. This means you’ll require more tenants in order to profit. In other words, you most likely won’t have the luxury of being picky with who you want in your property. You have to keep all units occupied if you want to earn money, which means your criteria has to be lower.
3. You’ll spend more on maintenance
When it comes to one unit, you will likely be able to handle most repairs by yourself. However, if something happens to your multi-family property, you’ll require help from more than one professional. To be a true multi-family investor, you’ll probably have to join forces with some property management company to maintain the property the right way.
4. The demand is low
In the age during (and probably after) the Coronavirus pandemic, the demand for multi-family rentals is low. This is because more and more people want to live secluded and don’t feel like sharing their living space with a stranger. At the same time, multi-family properties are hard to sell. The average US citizen won’t be able to afford them, and it isn’t likely most people want them, anyway.
Both single-family and multi-family real estate investing has its pros and cons. In the end, it all comes down to your own preferences and expectations. At the same time, we feel like there is no need to choose between the two. If you have the skill and the capita, you could invest in both types of properties at the same time, creating a versatile portfolio.
Still, if you are just starting, investing in single-family homes is probably a better option for you. They are easier to purchase, they are high in demand, and if anything goes wrong you’ll easily be able to resell them. If you are an experienced investor, you could certainly profit from purchasing a multi-family home, as well.