One of the first things that most people struggle with when they decide they want to break into the rental world, is whether they should buy a single family home, or a multi family property. I'll cover some of the basics, and go through the pro's and con's, so that you can decide what might be best for you.
Single Family Rentals:
PROS:
1. The financing is better. Generally you can buy your first SFR for $0 dollars down. Live in it for a year, and then rent it out. Even after the first SFR you purchase, you can get additional investment loans for 10%-20% cash as a down payment.
2. Less turn over. Single Family Rentals can appeal to a tenant base of families, who tend to be more stable and stationary then your average college student, or tenant. They stay and rent from you longer, which means you lose less money each year to vacancy.
3. Fewer capital expenditures. In a SFR, you only have one water heater, one furnace, one set of appliances, etc. You'll spend less money maintaining these big ticket items.
4. Appreciation is higher. There is always a demand for owner occupied housing. Each year, your property value will go up at a fairly consistent pace.
CONS:
1. Harder to qualify the 1st time. The first SFR you purchase, if you're taking the $0 down route, will need to be carried on your own personal income. That means that you'll be limited in what you can buy, based on how much you can show on your tax returns.
2. Rents are lower. Now, it's not to say that you won't be able to rent your SFR for very much money, but pound for pound, you will receive less cash-flow each month than your multi family counterparts.
3. Vacancy hurts. Though hopefully you don't have very much vacancy, when your tenants move out, there is no other income being produced by that property to balance out the mortgage payment. This means you have to make the payment out of your own personal income until the SFR is filled.
4. Repair/replacement cost are higher. SFR's will generally have a higher quality of finishes and fixtures in order to get top dollar rents. Combine that with the fact that tenants will occupy a SFR for a while, and you end up with carpet that needs to be replaced, paint that needs to be renewed, etc. Getting the building ready for the next tenant will cost more money than an apartment.
Multi Family Rentals:
PROS:
1. Extra income added to yours. When you go to get financing for a MFR, they will take the income being generated in each one of the units, and add 75% of that income to your personal income used to qualify for the loan. This really allows the property to help pull its weight, and makes it easier to obtain long term financing.
2. Easier to grow fast. You can buy your first MFR for only 3.5% of the purchase price down. Although you still have to live in it for a year, you can immediately rent out all the other units. This gives you immediate income, and likely covers your mortgage payment, giving you more cash each month to invest. When you move out, that income only increases. You can use that income to qualify for your next investment purchase.
3. Vacancy is balanced out. Though turn over is definitely higher in MFRs, it's less harmful, because if you have one unit empty, or unable to pay rent, you have several other units producing income that can be used to pay your mortgage.
4. The numbers are much easier to navigate. The value of a MFR is almost solely based on the amount of income it can produce. That means that based on how much you rent your building for, you more or less know what your building is worth. Raise the rents... raise the value.
5. Less expensive finishes/fixtures. The tenant base that occupies apartments will not care as much about the quality of the finishes and fixtures in your apartment. There is such a demand for housing, that many tenants will accept what is available, and what is affordable. This requires you to spend less money on your building.
6. Cash-flow is higher. You have multiple apartments generating income, with a higher rental floor. For example, in my area, a 3 bedroom SFR might rent for $1,100/month, but three 1 bedroom apartments in the same building will rent for $600/month each. Creating a cash-flow of $700/month higher for the same amount of bedrooms.
CONS:
1. Higher down payments. After your first MFR, most investment loans will require a 25% down payment. That's a large chunk of cash. There are a few ways to get around this, but 25% down is typically the standard.
2. Higher turn over. Owning MFRs, your primary tenant base will be transient. These are your students, lower income, and younger tenants that will often find themselves in a different place year to year. Hopefully you can fill the apartments pretty easily with pre-leasing and demand, but it's still more work.
3. Evictions. You'll deal with more evictions renting apartments than you would with SFRs. This is just because younger tenant bases have less experience with money management, and because people in this bracket generally have a lower level of job security.
4. Higher capital expenditures. If you purchase a fourplex, you have four furnaces, four water heaters, four sets of appliances, and any number/combination of things can go wrong. You have to set aside higher levels of reserve cash for big ticket item failures. In Conclusion:
I know people who have made millions in the single family market, and people who have made millions in the multi family market. Owning any type of real estate is rarely a bad idea if you're willing to put in the work. It will always come down to how fast you want to grow, and how much risk you're willing to take to achieve that growth. Reach out to me if this was helpful or provoked any ideas! Follow us on IG and Facebook!
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