The global pandemic hit the real estate market hard, but in 2022 the market bounced backed with a roar.
If you’re thinking of investing in real estate for rental, you have two main options. You can opt for investing in a single-family rental or instead invest in multifamily rental properties.
The big question is: which should you choose?
Read on as we take a look at some of the pros and cons of multifamily vs. single-family investing.
What Is a Single-Family Rental?
Single-family investing is when you purchase properties that are freestanding structures with no connection to any other properties. As the name suggests, the entire property is intended to house a single family.
With single-family properties, the owner will usually own both the property and the land that it sits on. Utility and HVAC systems are self-contained and not shared with any other dwellings.
What Is a Multifamily Rental?
Multifamily rental properties are a collection of separate residential units within a single building, such as an apartment building. Again, as the name suggests, the entire property can house multiple families within one structure.
Unlike with a single-family rental, the land that the building is on may be owned by more than one party.
Pros of Single-Family Rental
There are pros and cons to both types of rental property. Let’s take a look at some of the benefits of single-family rentals.
With single-family rentals, you’re only buying one property. With multifamily rentals, you’ll be investing in multiple properties at once, or even an entire apartment building.
This means that the outlay for multifamily rentals is usually significantly higher than for single-family properties. If you’re looking for a smaller investment, then single-family is the better choice.
The demand for single-family homes is understandably much higher than the demand for multifamily properties.
With multifamily, you’re likely to be selling to another investor. With single-family, you could be selling to an investor or simply someone looking for a new home.
That means it’s easier to find a buyer when you come to sell a single-family property.
Better for Diversification
Diversification in investment is always recommended.
The lower cost of single-family properties means that it’s easier to invest in a range of single-family properties in different locations. There’s less risk if a neighborhood becomes less desirable for some reason.
Fewer Tenant Issues
With a single-family property, you’re dealing with one set of tenants. With multifamily properties, you have multiple tenants to deal with.
That means everything is multiplied; the search for and vetting of tenants, dealing with tenant problems, and more. Fewer tenants mean fewer tenant issues.
Cons of Single-Family Rental
There are some downsides to a single-family rental. You should take these into account when making your decision.
Interrupted Cash Flow
One of the biggest issues with single-family rental homes is that when you don’t have any tenants, your cash flow is completely interrupted. Until you find new tenants, your investment won’t be earning any money.
A multifamily rental mitigates this issue, as even when one unit is vacant, the other units will still be earning.
Higher Insurance and Maintenance Costs
A single-family home usually has insurance and maintenance costs, because you lack any economies of scale.
There is also more to maintain, with gardens, garages, and more needing to be taken care of. Additional structures such as garages also need insuring, which will increase your costs.
Harder to Manage Multiple Properties
If you have multiple single-family properties, then these can be harder to manage than a multifamily property.
With a multifamily property, the units are all in one location, whereas with multiple single-family properties, you’ll need to travel around to deal with issues at each one.
Harder to Scale
If your real estate investment strategy includes plans to scale, then single-family properties are less ideal. If you want to find another 10 units, then you can do this in a single stroke with a multifamily property. With single-family properties, you’ll need to find 10 new individual properties.
Pros of Multifamily Rental
Multifamily properties have a number of benefits over single-family rentals. These are some of the most important.
Economies of Scale
One of the biggest benefits of multifamily investments is that you get to benefit from economies of scale.
You can negotiate better rates with vendors and contractors since they’ll be working on multiple units. It means that the total cost per unit is significantly reduced. The less money you spend, the more profit you can make.
A multifamily investment is ideal if you’re looking to scale quickly. You can add multiple units to your portfolio in a single purchase, meaning that your rental business can grow at a much faster rate.
In the time it takes to find ten new single-family homes, you could find ten times that number of multifamily units.
Better Cash Flow
With more units brining in rental income, your cash flow will be much healthier.
Even if you lose a tenant, all of your other properties will be bringing in money, so you won’t feel the hit nearly so hard.
You Can Be An Owner-Occupier
Living in one of your own multifamily units can make things much, much easier. You’ll always be on hand to deal with issues, and don’t have to worry about travelling to and from your properties.
You can’t be an owner-occupier of a single-family home if you want to make rental income.
Cons of Multifamily Rental
Multifamily properties do have their cons too. Here are some of the main issues.
Can Be Less Attractive to Tenants
When we dream of a home, many of us imagine a detached house with a garden and a white picket fence.
That’s why single-family homes can be more attractive to tenants, who like the idea of living in their own home separate from anyone else. You’re likely to find higher demand for single-family rentals than multifamily.
Harder to Sell On
When it comes time to sell up, you have a much wider market to sell to with a single-family property.
This means that it may take you a little longer to sell your multifamily property, and you may have less influence over how much your property will sell for.
More Difficult to Get Finance
With a single-family property, there are multiple ways you can finance your investment, including a traditional mortgage.
There are not as many options available when trying to finance a multifamily property, and you may need to pay more upfront. However, with a commercial mortgage, you may be able to negotiate better terms since a multifamily property has the potential to generate higher revenue.
Are You Thinking of Investing In Real Estate?
If you’re thinking about investing in real estate, then you may be on the fence about investing in a single-family rental vs. multifamily rental. The truth is that there is no right or wrong answer; both have their pros and cons, and both are great investment opportunities. You need to think about which type of rental is more suitable for you.
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