Are you ready to invest in real estate or to purchase a home, but you’re not entirely sure what kind? You’re not sure if you should go for the traditional single-family home where your tenant can have their own space, or if you should get a multi-family dwelling, that’s going to help you increase that cash flow over time while your tenants can help you pay off the mortgage.
If you’re not sure and you’re looking to find out what’s the best way to go about this, you have arrived at the perfect article because that’s what we’re going to cover.
Pros and cons, what’s better for you? Should you invest in a single-family home or should you buy a multi-unit? Before that, let’s try to define what they’re about for those who are not sure about that.
You have the traditional single-family homes, that’s what most people know as a single-family home. That’s in essence, a property where only one family can reside. For multi-family, we’re talking about a property where you have more than one family.
Examples could be a duplex where you can place two families in there, triplex, quadplex, or an actual building where you have lots of apartments in there. Anything from two and above will make up a multi-family.
The best Real Estate Investment: Financial side
What we need to do now is just to do a comparison. The first comparison we’re going to do, it’s on the financial side. You have single-family homes and you have multi-units or multi-family. We’re going to talk about finances because that’s usually where we face the most struggles when we’re trying to get in.
Single-family home: What’s one of the good things or some of the bad things that you can expect with a single-family? One of the greatest things with a single-family is that you have a low entry barrier because typically, you can get away with just putting somewhere between 5% to 20% as down payment.
Meanwhile, with a multi-family, the impression that you get out of multi-families is that it is typically for commercial use.
You have multiple families you want to place together, and therefore, the lenders want to see more skin in the game.
For that, they have a higher entry barrier and they typically require you to put down at least 25% down. There’s a caveat to this one, and that is if you were to reside in that multi-family. If you were to say invest in a multi-family up to four families, you can reside in one of the units and rent out the other three.
If it’s a duplex, then you can live on one side and then reside on the other half. If you were to invest in a multi-family that it’s four families or less, then you can get away with having a low entry.
You can get away with paying around 10% down if you can prove that you’re going to reside there or that you’re going to use that property as your primary residence. Other than that, anything where you don’t reside in there or anything that is five families or above, you’re going to have a higher entry barrier somewhere between 25% or above.
Strategies to make a good investment
Another benefit is, for example, in a single-family home, you have a higher chance of appreciation. Why? Because you have multiple exit strategies. You can sell a single-family home to a homeowner. Homeowners typically tend to buy with emotions. They don’t mind going above and beyond and getting that dream home that they want.
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At the same time, you can also sell this to investors who specialize and are just buying single-family homes and rent it out. If you were to compare this to a multi-family, then in terms of appreciation, you actually have less appreciation in multi- families. Why? Because the tendency is that usually, multi-families are for rentals, they’re not for homeowners, for someone who typically wants to reside there.
The impression is that, if this home is rented, then people typically don’t take care of it, or at least that’s the belief. That’s the perceived idea that most people get. When you have your home, when you own your primary home, you typically will want to take great care of it. You want to make sure it looks pretty. You want to add fresh paint. You want to fix up the kitchen, so it looks nice. Same thing for the grass.
Because of that, the appreciation goes up more on the single-family as opposed to a multi-family. Therefore, your exit strategies are limited because typically, the ones who tend to want to buy multi-families are investors. As you know, investors love to buy low. Therefore, they’re not going to pay an extra single dime for something that is not worth it, unless it’s an inexperienced investor.
Single Family Vs. Multi-family: Grow your portfolio
We also have to consider the income. In a single-family, you are highly dependent on only one source of income versus in a multi-family, you have multiple sources of income. For example if you buy a four-family dwelling, and you experience a vacancy in one of them, you still have the other three, or if you were to reside there, you still have the other two units that are being rented.
Then part of that income, it’s going to help you cover the mortgage, and then whatever you put from your own pocket since you’re residing there.
These are definitely some of the factors that you need to consider. None is better than the other. It’s more about what’s best for you in this case. Going through that list, we have to add one more, and that it’s in terms of growth. With a single-family home, the growth is lower because you’re growing your portfolio one house at a time.
In comparison to multi-unit, your growth is faster because with one dwelling, you’ll have four apartments or one dwelling, you’ll have three, or if you’re buying a building, all you got to do is just to make one purchase, and then you’ll get multiple apartments in it. Which in essence, it is something very important to consider because of the amount of mortgages. As an individual, you can have up to 10 mortgages max.
When you are trying to expand in real estate, you definitely need to consider this because in a single-family home, you can buy one house at a time. That means that by the time you buy four single-family homes, you have already used up four of your mortgages. That means you have six left, but the more mortgages you add to your credit, the more difficult it gets to get approved going forward.
When you’re investing in a multi-family, if you can buy a four-family dwelling, all you need is just to use one mortgage of your mortgage card. If you buy one single dwelling that has four units in it, you are only using 1 out of the 10 mortgages, which means you still have nine mortgages left in the equation for you to use.
Versus on the single-family side, if you buy four different houses, you already used up four, which means you only have six mortgages left in the equation, so definitely something very important to consider.
Management of your real estate investment
There’s something very important when it comes to the management of your property because you need to see if you’re actually cut out for it. The first item has to do with management and finances and that also has to do with the value of the house.
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The value of the house is based on the comparables. Any houses around the area that meet the same criteria: They are just as nicely fixed as yours and as well taken care of as yours, those houses, the historical prices of how much they have been sold, it’s what’s going to determine how much your property is worth.
Everything is based on a comparable which in a way takes away from your control of creating value. On a multi-unit, the value of your property is based on the rent that it generates.
That has to do more with the market. If you want to fix it up and get one of the units a little bit nicer than what’s in the area so then you can demand a little bit more rent, and maybe you decide to cut down some of the expenses in terms of management.
That means that in the end, you’re going to wind up with more gains or more cash flows in the end so your property value is going to be based on that.
If you’re looking to grow very fast, then you should definitely go on the multi-unit side because you get to do everything by the bulk, and then you can grow faster.
Single Family property and Multi Family property: About the tenants
In terms of tenants, there’s a belief that when you have a single-family home, you get better-quality tenants. Why? Because these are people who can afford more and that’s “usually” the equivalent of higher education. The higher education you have, the more privacy you’re going to need, the more you can actually afford versus a multi-unit.
For the most part, an apartment in the same area in comparison to a house will always be much more affordable than an actual single-family home.
Tenant quality: There’s a perception that the single-family home tenants are higher quality and talking about multi-units, the perception is that they are lower quality tenants.
Lower quality tenants means that your qualification process is going to take a little bit longer because maybe the demographics in the area need to check out more items like credit, income sources and other referrals from them.
Most people, unless you live in big cities, big metropolitan areas, will always prefer to have their own home. Why? Because it’s nice to have your own home office or to have a yard where your children can run around.
It’s higher in demand because of the exit strategies that you have. You can sell the homes in the end to home buyers or you can sell those out to real estate investors as well.
There’s always going to be a higher demand for a single-family home versus a multi-unit. Only those who are cut out to invest are those who are going to be looking for multi-units.
If you want to go to a multi-family property, then you need to ask yourself, “What’s my long-term goal?” In terms of multi-families tenants, then you need to ask yourself as well, “Am I cut out for something like this? Can I handle more volume? Can I handle more people?”. That’s definitely something to consider.
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