Single-family and multi-family rental properties have their own unique benefits and drawbacks, and prospective real estate investors should weigh these options carefully before taking the plunge and making a purchase.
Financial Benefits of Single-Family Investment Homes
Lower start-up costs make single-family rentals a less expensive way to get started in real estate investing. Lenders typically require a minimum down-payment of 20 percent for residential real estate loans, while commercial lenders charge an average of 25 to 30 percent for the down payment on apartment buildings.
In addition to immediate costs, there are several other benefits to single-family rental properties. Resale opportunities and demand will often favor single-family properties. Single-family rental homes are much easier to sell, since prospective buyers include traditional homebuyers and investors. This significantly widens the pool of potential buyers.
Single-Family Homes and Tenant Pools
Single-family properties are also in higher demand on the rental market. We expect this demand to increase. Census statistics indicate that the number of single-family rentals increased by 31 percent between 2007 and 2016, while multi-family rentals grew by 14 percent.
The combination of stagnant wages, high living costs, and student debt makes it difficult for would-be homebuyers to afford down payments and qualify for mortgages, so it comes as no surprise that single-family rental units are a popular alternative. This coincides with millennials beginning to start families, and many new parents prefer single-family homes over apartment buildings.
This brings us to another key benefit of single-family rental properties: lower tenant turnover. Tenant turnover is a major inconvenience and expense for real estate investors. It takes time and money to clean rental units, repair damages, place listings, show the property, and screen new applicants. Investors also lose rental income if a unit remains vacant for too long. Tenants at multi-family rental properties are less likely to consider the rental their own home, while renters of single-family properties typically want to establish roots. Just over half of renters at single-family rental properties are families, and parents are often reluctant to relocate their children to new school districts. Single-family rental properties encourage stability.
Benefits of Investing in Multi-Family Properties
There are also benefits to investing in multi-family rental properties. Higher monthly cash flow is one of the most obvious benefits. If you own a duplex or a four-unit building or something larger, it’s unlikely that every unit will be vacant at the same time. You’ll have a more consistent cash flow.
Additionally, the economics of scale makes it more cost-effective to repair several rental units under one roof than to repair several single-family homes. So, your repair costs may be more manageable when you own multi-family homes.
Many investors live in one of the units when they own a multi-family building. This can be tremendously cost-effective. When you buy a three-unit home, for example, you can live in one unit and then rent out the other two. Your mortgage payment will be covered by your tenants and you won’t have to worry about your own housing payment. It will also help you obtain financing when you’re going to occupy one of your units.
Whether you choose to invest in single-family rental properties or multi-family rental properties, hiring a property management company is an excellent choice for any investor in residential real estate. No matter how many units or tenants you have, investing in real estate requires maintenance, inspections, rent collection, and countless other responsibilities. Handling all of these tasks on your own is one of the biggest mistakes an investor can make. If you have any questions or need help, please contact us at McCaw Property Management.