Real estate investors have long debated whether single-family homes or multi-family homes are the better investment. A single-family home is just what it sounds like, a traditional house for a single-family. A multi-family property houses many families in apartments, duplexes, triplexes, or condos; owners hold the property and rent it out. For many investors, investing in single-family homes is a good option. One-third of all U.S. rental properties as of 2018 were single-family homes.
Single-Family vs. Multi-Family Investment
Traditionally, investors started by investing in single-family homes and then moved on to multi-family investments when finances allowed. However, many modern investors are staying with single-family home investments.
Single-family homes make up almost 70% of the housing market, so there are many to choose from. Investing in single-family homes costs less, and they sell faster and have been appreciating more quickly than multi-family properties.
Things to Consider Before You Invest
Before investing in single-family homes, there are some things you should consider carefully. Proper planning can mean the difference between a successful investment and taking a loss.
You need to know your investment criteria. Some homes may be riskier investments but have higher returns depending on location, age, and condition. Different homes have different return potential. Know what you are looking for in an investment.
In the digital age, it is easier than ever to view and buy homes outside your area. Once you buy, you just need a good property manager, and you don’t have to worry about being near your investment.
Separate Investment and Operations
While you could manage your property yourself, a good property manager can save you a lot of time and even some money. Though they do charge approximately 7% or 8% of the rent, they can ensure that:
- The property remains in good condition
- The property is leased.
- Maintenance issues are handled quickly
- Any problems the tenant reports are resolved (so they are happy and stay)
It is beneficial to have a property manager even if you are investing in your area.
Return on Investment Takes Time
Investing in single-family homes is about building long-term wealth. Though you could do what flippers do (buy, make a few improvements, sell), it’s only a one-time profit. If you want to build wealth long-term, having tenants will ultimately be more profitable. Moreover, if you are in it for the long-term investment, ignore short-term fluctuations in the market; you can own a home for decades and profit from both rent payments and appreciation.
Pros and Cons of Single-Family Home Investment
There are several upsides to investing in single-family homes. These benefits make them an attractive option for investors with limited capital. However, there are also some cons to weigh.
When investing in single-family homes for rentals, you can be choosier about your tenants because you only have one unit to fill, whereas, with a multi-family property, you have many units to serve.
Whereas multi-family dwellings are prone to constant turnover, you won’t deal with turnover as often by investing in single-family homes.
Generally, investing in single-family homes requires a single mortgage for each, which means you’ll need less money per investment.
Moreover, underwriting terms for residential mortgages are usually more favorable than for multi-family homes, and single-family dwellings require less maintenance than a multi-family building.
To make investing in single-family homes profitable, you’ll need several properties to get a strong cash flow going. If you have difficulty finding tenants, you may fall behind on the mortgages or be forced to sell.
If you seek a sizable real estate portfolio, it is harder to do this by investing in single-family homes. Twelve properties mean going through the mortgage process twelve times. You will also see a smaller initial return on your investment.
Tenants for single-family homes tend to be more stable, have higher incomes, and be married. They are more likely to stay longer than apartment dwellers because tenants prefer single-family homes’ space, privacy, backyards, and storage space. These homes are especially appealing for families with children because they are more likely to be closer to better school districts.
In general, you will find that you can develop better long-term relationships with single-family home renters than with apartment renters.