11 Jun 2013
Multi-family vs. single family real estate investing
If you’re considering investing in real estate then you’re probably wrestling with the decision of whether to invest in a single family or multi-family home. This is a topic that has been heavily debated among the real estate investment community. As this debate rages on let’s take a look at some of the advantages and disadvantages associated with each.
Purchasing multi-family properties has been a traditional practice in real estate investment for years which presents its own unique set of pros and cons.
The first advantage to multi-family investing is that it provides a larger pool of possible tenants. This is because the rent in a multi-family unit is comparatively lower than rent in a single family unit. The lower cost of rent expands the range of potential tenants as more people can to afford to live in the multi-family building than the more expensive single family home.
Another advantage to multi-family investing is that the cash flow situation is usually better with these types of properties. This is because, with a multi-family home, you typically get more units at a lower price per unit. Also, multi-family buildings offer more wiggle room for the investor in regards to vacancy. For instance, if a five unit multi-family home has one vacancy, there are still four other tenants paying rent whereas a vacancy in a single family house means the investor receives no rent at all.
Multi-family properties also offer a higher level of convenience. Any issues that arise with tenants will be constrained to one location as opposed to single family properties where it may be necessary to visit multiple locations.
On the flip side, although multi-family homes provide larger pool of possible tenants they tend to have a smaller pool of potential buyers when it comes time to sell. There is a much larger market for selling a single family home and the list of potential buyers for multi-family units tends to be limited to investors.
Another disadvantage with multi-family properties is that they typically require more maintenance. This is due to the fact that there are more people living in a multi-family house which causes more wear and tear on the building.
Single family and multi-family housing each possess various pros and cons.
Although having all the tenants in one location has its benefits, there are also some drawbacks. Troublesome tenants can be dealt with individually in a single family home, but in a multi-family home these types of tenants can cause problems for the rest of the tenants living in the building. Inter-tenant squabbling can become a nuisance in multi-family units and lead to more serious issues.
Single Family Units
Much like multi-family properties, single family properties also come with a long list of advantages and disadvantages.
A major advantage to single family investments is that they appreciate much faster than multi-family investments. This coupled with the larger pool of potential buyers makes selling a single family home much easier than attempting to sell a multi-family house.
As mentioned before, single family units are easier to manage as there is no potential for fighting between tenants. This eliminates a whole host of problems and issues that could arise. Managing the requests and complaints of one family is much simpler than trying to attend to the needs of multiple families.
The ability to vary the location of tenants through single family homes also provides some benefits. By diversifying the locations of these investments it protects against things like disaster or declining status of the surrounding neighborhood.
The biggest disadvantage to single family homes is the risks associated with vacancy. If these homes become vacant it will be the investor who shoulders the burden of utility bills and general upkeep of the house.
Another disadvantage to single family investments is their price. These types of investments tend to cost more per unit than their multi-family counterparts.
Finally, single family units present some complications when it comes to maintenance. Each individual unit will have its own unique features which will each require unique repairs. For example, if two single family units need new roofing it is necessary to buy two new roofs rather than replacing just one roof on a multi-family unit.
Single family and multi-family housing each possess various pros and cons. Depending on the investor, and their situation, one may be more appropriate than the other. While multi-family and single family homes offer viable real estate investment options, the debate as to which is more viable will surely continue to be discussed.
Peter Slaugh is the managing director at Steelhead Capital, a lender who provides commercial loans along with apartment loans. Peter has had a strong career working with multi-family units and urban villages around the globe.