Investing in residential real estate is a great way to build a long-term income source and a portfolio of assets that grow in value. For those investing as landlords, the choice between single-family and multi-family investment properties is essential. While most portfolios begin with a single-family home or two, often a result of your own home-buying patterns, multi-family properties allow a rapid expansion in your portfolio strategy with greater internal stability.
What should your next property investment plan be, as a rental home landlord? We’re here to offer a helpful guide to investing in single-family vs multi-family rental properties.
What’s the Difference Between a Single-Family Home vs. Multifamily Home?
Single-family homes are typical houses designed to hold one family. They are the most common type of property for first-time landlords. Multi-family homes are buildings that contain multiple units, like apartment or condo buildings. These properties are favored by experienced landlords ready to make a serious investment. Let’s jump into the pros and cons of each.
What is a Single-Family Home?
A single-family home is a house that holds one family. Individual home buyers typically prefer single-family homes. They are the most popular type of rental homes for landlords because they are approachable to purchase, and management tasks are easy to understand. Many landlords start renting single-family properties that they have previously lived in or inherited. Others begin to rent their vacation homes during the off-season and transition to full-time rentals as they expand single-family investing locally or in destination spots.
Right now, there are about 14.5 million single-family homes being rented in the US, while the national average monthly rent for a single-family home is around $2,000 a month. Rent and home values have increased significantly in the last few years, and demand for housing makes single-family landlording quite valuable.
Pros of Managing a Single-Family Home
- Approachable finances
- Familiar maintenance list
- Typically quiet neighborhoods
- One property and family at a time
Cons of Managing a Single-Family Home
- Income stops during tenant turnover
- Buying from individual owners
- Subject to neighborhood price increases
- HOAs
What is a Multifamily Home?
A multi-family home is a building that contains more than one home. Higher occupancy buildings start with the two-unit duplex, three-unit triplex, and grows from there to towers of more than 100 home units per building. Multi-family homes are a popular choice for experienced landlords looking for bulk efficiency and some revenue cushion during tenant turnovers. Managing a multi-family property, naturally, requires the effort of caring for multiple units and tenant households, but with the benefit of economies of scale.
Multi-family housing has the benefit and challenge of unified maintenance, as units share a roof, plumbing, and more luxurious amenities. They also offer the benefit of a more stable income, as the income from multiple rent sources can cover one or two vacancies in the building so that turnover does not automatically result in temporary losses.
There are approximately 13.7 million multi-family units across many properties in the US, and the average with a national average multi-family unit rent of around $1,500 per unit per month.
Pros of Managing a Multifamily Home
- Economies of scale
- Steady cashflow
- Multiple housing units
- Cushioned turnover from building-wide income
- Buying from fellow investment owners and companies
- Design opportunities
Cons of Managing a Multifamily Home
- Higher down payment and other investment costs
- Greater maintenance and management requirements
- Upkeep on amenities and parking lots
- Handling tenant interactions
Other Common Property Types to Consider
Most investment properties are single-family and multi-family homes. Landlords commonly seek out these property types because they are understood, and the business model is easy to build. However, there are also other types of properties worth considering that can make valuable residential real estate investment opportunities under the right circumstances.
Condos and Townhomes
Condos and townhomes are individually owned, but also attached, single-family homes. Townhomes are often two-story (or taller) homes that are connected in slices instead of sharing a building with internal floors and hallways. A condo is typically more like a very nice apartment building that is inside a shared building with some swank amenities.
- Pro:
- Elegant and efficient housing, often in high-density / high-demand areas.
- Con:
- Dealing with HOAs and Condo associations fees and restrictions
Foreclosures
A foreclosure is a home that is auctioned (or about to be auctioned because the homeowner cannot complete their mortgage. Foreclosures are homes sold in a rush, often as-is, at a discount, and/or through an auction instead of the usual housing market routines. Owners are selling in a rush or the bank is selling for them, creating an advantage for real estate investors.
- Pro:
- Low cost and fast purchase
- Con:
- The likely need for more up-front maintenance and move-in-ready investment
Fix-and-Flips
Fix and flips are renovation investments. They are the ultimate incarnation of “buy low, sell high” in the real estate world. Depending on your budget and/or personal handiness, you can buy homes that have “good bones” but need some renovations before they are move-in ready for renters. Taking a home from shabby to residential is a “flip”. Fix-and-flips often offer the best ROI, Return on Investment – if your renovations are cost-efficient.
- Pro:
- Low initial investment and design freedom in renovations
- Con:
- Securing financing from lenders on a damaged house can be more challenging
Commercial Real Estate
Commercial real estate includes storefronts, office space, warehouses, and hospitality venues. It is a serious expansion for residential landlords, but also often a good investment in the right location and real estate market. You will need a commercial realtor to break into this type of real estate market.
- Pro:
- Diversifying your real estate portfolio with higher revenue properties
- Con:
- Higher investment threshold and longer vacancy cycles than residential properties.
Each real estate investment expands your portfolio and increases your potential to build revenue with monthly and annual income. Expanding by one single-family home at a time is a stately and manageable approach that opens the doors to luxury estate properties. Choosing to step into multi-family investments can allow you to expand more rapidly while taking on new elements of property management strategy.
Which is the best property type for your next residential real estate investment? Your investment strategy is unique to each real estate investor, based on the finances and personal strategy of each landlord. To find your next ideal property investment, contact us today.