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Real estate investors, including business executives/entrepreneurs who may be new to real estate and are looking to tap into new income streams, often grapple with the decision between investing in single-family homes or multifamily properties when allocating money for rental properties. Each has its pros and cons, so it’s crucial to carefully consider a number of factors before making a move.
Prioritize goals
First, clearly define and categorize your goals when it comes to investing. If maximizing ROI is most important, look at what type of property has the best potential for rental income and appreciation. Properties with more units generally perform better here, giving them a higher ROI in the short term. However, single-family homes can offer better appreciation in some markets, which can provide higher earnings in the long term.
If your main priority is maintaining or increasing cash flow, a different perspective is needed. Both property types have potential here, but single-family homes see more reliable growth and their rents have grown steadily by about 3% since 2010. They also tend to attract families who prefer longer lease terms, resulting in an influx of more substantial case.
However, multifamily properties offer the opportunity to spread out expenses such as property management, maintenance and utilities, leading to lower per-unit operating costs.
Related: The Entrepreneur’s Guide to Building Wealth Through Real Estate
Evaluate your experience level
Your experience as an investor and owner plays a significant role in determining what type of property will be a better opportunity. For starters, it may be best to look for smaller properties, as a multifamily property involves collecting multiple rents and maintaining multiple units, which means more communication with tenants. That said, those new to the process shouldn’t underestimate smaller multifamily homes (like duplexes and triplexes), which can be easier to afford and manage than larger buildings.
On average, single-family homes require a lower initial investment, making them more accessible to inexperienced investors and/or those who have or prefer to invest less capital. They also tend to attract more financially stable, long-term tenants, making it easier to collect rent. Duplexes and triplexes offer the best of both worlds: They allow less experienced investors to access multifamily properties at a lower entry point, with the benefit of collecting rent from more than one unit. They can also live in one while renting the others.
The more experienced ones are, not surprisingly, better suited to the complexities of larger real estate investments. In many cases, multifamily properties offer higher cash-on-cash returns. Additionally, depending on the market, rent per unit tends to be lower for multifamily units than for single-family homes, as collecting from multiple units yields a higher monthly rent. More experienced investors are also better equipped to deal with the higher costs (and more difficult barriers) of buying at this scale, including obtaining a commercial loan and adhering to additional regulations.
Related: 3 emerging trends shaping the future of real estate
Consider risk tolerance
Before deciding on a property type, consider how much risk you are willing (and can afford) to take on and how comfortable you are with market volatility, tenant turnover, vacancy rates, financing and modifications regulations.
Single-family homes may offer a lower risk in terms of tenant turnover because those who rent them are more likely to be families or couples who consider the rental their home and therefore stay longer. That said, it’s also important to consider the risk of long-term vacancies, which can cause a significant financial burden until a new tenant is found. (When a multifamily investor loses a tenant, the rent from the other units can make up for the loss.)
Even with multifamily properties, there are risks, such as market changes and structural problems. Diversifying across multiple property types and markets can spread risk, insulating investors from the pitfalls of both property types (if one has problems, the others can balance things out).
Related: Commercial real estate: crisis and opportunities
Determine scalability
If you want the ability to grow your real estate portfolio over time, investing in multifamily can be a good strategy, especially if you take advantage of economies of scale. (As the number of units increases, so does the potential for cost savings and income generation.) These can often be better deals: offering utility savings and wholesale pricing on materials and services for maintenance repairs and projects home improvement products, as well as prices on appliances and household items. Additionally, managing multiple units within a single property simplifies tasks such as communicating with tenants, scheduling maintenance, and collecting rent.
Such properties may also attract more favorable financing options. With the potential for higher rental income and a lower risk of vacancy, some lenders may offer better deals on interest rates and lending terms, reducing the cost of capital needed to grow, and there may also be benefits tax. Additionally, purchasing a 20-unit condominium requires only due diligence and a closing transaction.
There are scaling benefits to single-family investments, too. Lower entry points in pricing, flexibility in mortgage lending options and minimal out-of-pocket expenses make it easier to strategically expand a portfolio, especially for those with less capital. It also allows for incremental expansion: by acquiring properties one at a time, investors have the flexibility to grow at a more comfortable pace, while waiting for the right opportunities to present themselves or the financial situation to improve. By using a more gradual approach, they can avoid the need for large capital infusions and complex financial structures.
Related: Why real estate investing is the ultimate adventure for entrepreneurs
Measure time commitment
Managing rental properties can be time-consuming, so it’s important to decide in advance how many hours you have (or want) to dedicate. If minimal commitment is your goal, a single-family home may be a good option.
Managing two or more units, of course, requires more time and effort, unless you hire a property management company (which increases operating costs). However, it is still possible to invest in multifamily properties without having to incur the costs of outsourcing activities such as resident screening, payment collection and repairs. Management technologies are available that can streamline and automate most of these tasks, providing greater flexibility and resources to diversify a portfolio while keeping time commitment relatively low.
These technologies can also open the door to exploring do-it-yourself opportunities that further expand your options when it comes to rental investments. Putting everything from listing and tenant screening to signing leases and collecting rent essentially on autopilot (controlled via mobile app or other platform) can allow you to manage from virtually anywhere. Such apps can also offer advanced features such as maintenance management, credit enhancement for tenants, renters insurance and accounting.
Related: Get this AI-powered real estate and property management platform for just $200