If you are a rental property investor looking to make your first property purchase, you may wonder if you should invest in a single-family home or a multi-family rental property. Each type of property brings a unique set of challenges to the equation, but they can also provide benefits to your pocketbook and investment portfolio.
Any hopeful property owner should take time to carefully research investment options before making any financial commitment. Done right, property ownership can be incredibly lucrative with minimal day-to-day work. Making a hasty purchasing decision can lead to the exact opposite; time and money poured into a property without a return on the investment. One of the first major decisions to make as a new property owner and landlord is the type of property you want as your first investment.
Benefits of Choosing a Single-Family Rental Property
New property owners have a tremendous amount of potential when they invest in single-family rental properties.
- Less worry. The main perk of choosing to invest in a single-family rental property is you have less to worry about overall. A single-family rental property will likely only have one tenant, a couple, or a small family. You won’t need to waste time resolving tenant conflicts that you might encounter if you purchase a multi-family rental property or an apartment building.
- Single-family rental properties cost much less initially, which can be ideal for a new property investor. You could probably find a desirable rental property in the $100,000 to $200,000 range around Chester County, while a multi-family rental property or apartment building could cost a million dollars or more depending on the location.
- A single-family rental property offers better resale opportunities. After a few years of earning rental income from a single-family rental property, you could potentially have the liquidity to fix it up one last time and sell it for a sizeable profit. This, in turn, could finance future investments, and you could see your property ownership income begin to snowball.
- Single-family rental properties are in high demand. They are the fastest-growing segment of rentals in the US housing market. Many young families do not have the liquidity for a down payment on a home and may not want to commit to a home purchase—but they tend to prefer to rent houses over apartments. You will have a much easier time keeping a single-family rental property filled than keeping every unit in a multi-family rental property full.
Drawbacks of Single-Family Rental Properties
The only real downside in choosing to invest in single-family rental properties is it may take longer to cultivate a strong investment portfolio. If you have plans to own ten rental properties eventually, you will need to purchase ten single-family homes. This entails ten different appraisal and inspection processes and possibly separate mortgages for each. Monthly cash flow tends to be higher with multi-family rental properties as well.
Perks of Choosing Multi-Family Rental Properties
Multi-unit rental properties offer significant benefits; however, they do have some added challenges:
- The main advantage of choosing to invest in multi-family rental properties is more income. You can purchase an apartment building with 20 units, and you have 20 potential revenue streams waiting for you.
- Multi-family rental properties keep paperwork simple. Instead of navigating ten different mortgage application processes, you purchase one multi-unit property and start earning money.
- Multi-family rental properties are generally easier to finance. A lender will be more likely to finance the purchase of one large property, whereas navigating multiple financing agreements for multiple single-family units can be very challenging.
- You can live rent-free in your own property. Many property owners who purchase multi-family rental units will select one for their personal use. If you don’t mind living in your own rental for at least a while, you can save a tremendous amount of money on your living expenses while earning rental income from your other units.
Disadvantages of Multi-Family Rental Property Investment
Investing in a multi-family rental property can mean significantly more rental income in a much shorter time than if you were to invest in a single-family rental property or multiple single-family properties. But doing so comes with additional challenges.
First of all, if you cannot keep your rental units filled, you do not earn rental income from those units. It can be more challenging to keep your multi-unit property full at all times. Additionally, investing in a multi-unit rental property is essentially putting all of your eggs in one basket. If the local economy nosedives, the losses will be more acute than if you had invested in multiple single-family properties in different areas with different local markets.
The decision is yours; single-family rental properties are easier to start and generally offer more reliable rental income than multi-unit rentals. But multi-unit rental properties offer tremendous potential to make significantly more rental income very quickly. Each type of property comes with unique risks and challenges. Property owners who take the time to research their local housing markets and invest in solid properties tend to find the most success, and there is no rule against buying one type of property after you’ve successfully invested in the other. You could potentially start a property ownership business covering multiple single-family and multi-family rental units, just be prepared for the challenges that each rental might pose.
Patrick Freeze is the President of Bay Management Group, which manages about 4,000 units in the Mid-Atlantic Region. The company is overseeing more than $700 million worth of real estate as of October 1st, 2018.