You’re ready to break into real estate investing… Great!
So, you’re doing some research and ultimately find a few great niches you could choose from, primarily single family or multifamily.
Single-family seems small and easy to tackle while multifamily seems more challenging but more lucrative.
So, which path is better?
Here are a few questions to ask yourself before deciding.
A multi-family home will require a much greater down payment and obviously, the monthly payments will be much higher. Additionally, the loan qualification criteria can be different if you are trying to buy a 5+ unit dwelling (though 2-4 unit multifamily can have residential mortgages put on them).
If you are looking for larger multifamily, you will almost definitely need partners to get the job done. This can be done in the form of a real estate syndication, or it can be done with a few fairly equal partners with specified roles.
Also, when doing multifamily deals, you will need a team of people – from experienced investors to partner with, you commercial lenders, brokers, insurance agents etc. Most of your residential contacts will not carry over into the commercial space.
Single-family homes are a lot simpler to buy and run. You are far more likely to get a loan from the bank along standard paths if you have a decent income and manageable debts.
Also, if you are between tenants, you are far more able to afford the mortgage payments. Maintenance costs are low and affordable, and your regular income can probably cover most things, even if you get a bad deal.
Get out a pen and paper. Calculate the down payment, the mortgage payments per month, and the rental income that you are being advised to charge based on the neighborhood and the condition of the property.
Also, you will need to budget for capital improvements, maintenance, vacancy etc.
If you need help calculating these, go check out this free calculator that can help.
Now, take some sample properties and plug them into the calculator. Try to get a few single family homes and a few multifamily to get a fair sample.
You’ll probably start to notice a trend between the two. In general, single-family properties have a lot lower cash-flow than multifamily, but there is often a lot of potential appreciation.
Regardless if that holds true in your particular market, look at the results on both and decide what sort of return you want. If you want a high, stable cash-flow, then multifamily is probably the best option. If you aren’t interested in cash-flow, then single-family properties may be the better choice for you.
Picking a property manager is a daunting task. It’s so difficult, that many owners will choose to manage the properties themselves.
Often, your available free time will dictate what you do. If you have a lot of free time, you’ll probably end up saving the money and doing the work yourself.
If you are very busy or just aren’t very handy around the house, you’ll definitely want to take the dive and get a management company.
But, with multifamily, you’ll probably want to bite the bullet and just get management. Overseeing a dozen units is completely different than a single-family house that you know every nook and cranny of.
You also need to consider if you want random calls for emergencies, such as arguments, loud music, water leaks, etc.
However, a single-family home might have small problems which you can fix yourself after you get home from work. That is a nice, easy option which will both cost less and will bond you and tenants together, further reducing their likelihood of moving out. Happy tenants equal more secure income.
Buying insurance for a home is often a lot cheaper than insuring a commercial property. There are a lot more considerations when insurance agents write policies for them.
This is because a multifamily property is considered a business, and there are all kinds of business riders and requirements you’ll need to consider.
While a single-family residence may also require a policy for landlords, it is a far cry from what is required for typical multifamily properties.
The last question you need to ask yourself is how comfortable you are with risk.
This question will determine whether you will feel more comfortable accepting higher risk and working with investment partners to acquire and rent out a multi-family property or if you would feel good renting out an easy-to-care-for single-family home.
Your comfort level with (and time for) property maintenance is also important.
Do you want to do the maintenance and repair work yourself? Or, perhaps you will hire a property management group to do the work for you. Be sure to factor in the monthly cost of their services when calculating your net income.
A professional property management company will take care of all the headaches for you. While a tenant still might leave the palce in tatters, the property manager will make it pristine before listing it on the market for you.
Of course, you’ll pay for this, but you won’t have to worry about the headaches.
Multifamily most definitely cash-flows better than single-family. The demand for single-family determines it’s price. Cash flow determines the price of a Multifamily property.
So, determine what sort of cash on cash return you are looking for, then decide what fits you better.
If you are looking for a high and stable cash-flow, you should go for multifamily property. If you are looking to just cover your costs and have something very passively creating value over years, then single-family might be a better option for you.
Both single-family and multi-family homes are great investments. You should feel completely comfortable with and confident in your final decision, regardless of which you choose.
Explore these topics further and calculate the cost and return on rent down to the last penny. This kind of careful attention to detail is what will, in the end, make you very successful in the real estate investing game.
Eric is an investor that achieved financial independence at the age of 30. He started in 2009 with the purchase of his first triplex and now owns over 470 units. He spends his time with his family, growing his businesses, diversifying his income, and teaching others how to achieve financial independence through real estate. Eric has been seen on Forbes, Trulia, WiseBread, TheStreet, and other financial publications.
I started out as a full-time student, over $60,000 in debt, and didn't even have a full-time job (two part-time jobs). Learn the system I used to create a 6-figure passive income.
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