Although quite trite, the adage that “old habits die hard” can also be true when faced with the types of properties that investors focus on – whether a real estate professional’s efforts lie primarily in the single-family home space or multi-family world may be a matter of preference, but it is unwise to disregard “the other side of the spectrum.”
Even the most experienced real estate professionals may get stuck in the mindset that one type of property is “their thing,” but this thought pattern can cause investors to miss out on opportunities that can add additional revenue streams, diversify their portfolio, and improve returns/reduce risk. Long story short: there is nothing in the lengthy (yet unwritten) rules of being a real estate professional that precludes him or her from investing in either single-family or multi-family units. With that said, however, there are positives – and drawbacks – to each property type.
Multi-family units have many pros, one of the most obvious being their scale; the economy of scale is important to keep in mind when crunching the numbers and performing the due-diligence required to acquire multiple units, each of which generates its own cash flow. Similarly, any repair costs that come up can be spread out, leveraging the costs against a larger asset base. Although the total cost of repairing a multi-family building’s roof, for example, may be greater, the cost is spread out amongst its various units (as opposed to one unit for a single-family home.)
The economy of scale also works in an investor’s favor in another way – after all, multiple units housed in one location means that tenants are all in the same place, which differs from the often scattered layout of single-family tenants. Landlords can likewise leverage greater negotiating power with service providers and other property managers when multiple units are at the same place (think bundled deals for high-speed internet, lawn maintenance, etc.)
Multi-family dwellings also have a greater potential for appreciation. Regardless of any upgrades or updates that have been made to the property, single-family homes have values that are usually tied to its surrounding property. Multi-family units, on the other hand, can incorporate value-add components that increase the value of not only the property, but can increase the rent as well (some amenities are particularly attractive to younger buyers, including health and wellness, on-site daycare, and exercise equipment.)
Where the economy of scale and value-add components positively highlight multi-family dwellings, there are some warnings associated with financing these properties. Tenant turnover, for example, is one of the biggest hassles of operating multi-unit dwellings. Even if a property is well-managed and immaculately maintained, tenants will still leave for a variety of reasons, which can hurt cash flow and leave empty spaces in a building – empty spaces that will need to be filled. Although tenant turnover can result in some headaches, it is certainly wise to account for this in budgeting, and put tenant screening into place before keys are handed over.
It is also important to keep in mind that due to the sheer size of these properties, their down payments are much more substantial than a conventional single-family unit. Sometimes, these down payments can amount to 25 percent of the property value, and some property managers require more cash “up front” if a prospective landlord doesn’t plan on living on-site. Although this may be the case, it is sometimes easier to secure financing for these properties because lenders usually attach more weight to a property’s cash flow (as opposed to solely looking at a borrower’s credit history, which is often the case for single-family units.)
Single-family units, although smaller in physical size, still have the potential to produce sizable returns and have many positivesassociated with them. The initial investment in a single-family unit, for example, is often smaller and likewise, renovation budgets are often smaller as well. Whereas multi-family dwellings can require down payments as much as 25 percent, a standard single-family home can be purchased with a 10-15 percent down payment. Because these up-front cash requirements are smaller, it may be easier for new investors to gain the financing required for these projects.
Multi-family dwellings are typically valued by their rental income streams, but single-family units are more determined by their location and the local market’s supply and demand. A single-family home in a desirable, up-and-coming area, for example, may appreciate quicker compared to a multi-family unit in a similar area.
One of the biggest drawbacks of these properties, however, is investors are limited to a single revenue stream. Payments are made by the sole tenant of the property, as opposed to multiple renters in a multi-family dwelling situation. Although this in and of itself is not necessarily an issue, scale-related concerns can come into question if an investor relies on a handful of single-family units for income.
Regardless of an investor’s proclivity for single-family or multi-unit dwellings, it is always wise to at least learn about other ways to increase revenue streams or expand a real estate portfolio. There may be positives and drawbacks to both property types, but approaching a potential investment with an enthusiast – yet cautious – eye is the best game plan.