Choosing whether to invest in a single or multi-family rental property can be a tricky decision to make. In the end, the choice comes down to your personal needs and investing goals. Choosing the investment that’s right for you depends on several factors. Let’s take a closer look.
When Single-Family Rentals Are the Right Choice
The best advantage of a single-family rental is the low cost to invest. The overall price for a single-family home tends to be significantly lower than a multi-unit building, and investors will have less-expensive options for financing as well. For example, a conventional mortgage is likely to be available, and since down payments are usually a percentage of the purchase price, the total cash needed to close the deal will be much lower.
Because single-family homes are easier to purchase, they are also easier to sell when the time comes. Not only will the smaller price tag open the market to more people, but you’ll also have the attention of both investors and traditional home buyers. Additionally, single-family homes make it easier to diversify your portfolio and invest in a variety of markets. By purchasing several homes, you’ll avoid the risk of sinking all of your funds into one large building and keeping your risk enclosed to a single building as well. From market downturns to natural disasters, diversity is often the key to staying afloat.
When Multi-Family Buildings Prevail
In many ways, managing a single building is going to be easier than keeping track of several smaller ones. For example, you’ll only have one roof to replace, one inspection to be present for, one insurance policy to carry, etc. However, while keeping tabs on multiple tenants and units may be a challenge, your bottom line faces considerably less risk from vacancies with a multi-unit building. For a single-family home, one vacancy means an income of $0.
In some cases, this reduction of risk can make a multi-family rental property easier to finance as the lender will consider the probability of a low vacancy rate and, therefore, an increased ability to make your loan payments on time. Plus, two- or four-unit buildings may be eligible for Federal Housing Administration (FHA) and Veterans Affairs (VA) loans if the borrower will be living in the building, and those tend to come with small down payments and competitive interest rates.
Maximizing Your Potential
Single-family rental properties are often seen as a safe choice for investors without a huge reserve of cash, or for those who want to get into several markets to spread out their risk. Multi-family properties are more expensive to purchase but can be a more stable source of income as vacancies will have a smaller impact on your bottom line. For investors who are unsure whether they are ready to handle the day-to-day needs of several families, a property management company can provide those services and make multi-family properties a more manageable prospect.
