Real estate investors have a lot of options when it comes to the type of property they want to buy. Before you begin looking at real estate listings, you’ll need to decide whether you’d like to invest in a single-family home or a multi-family building. Both offer a handful of advantages, as well as a few drawbacks.
Let’s take a look at some of the unique challenges associated with each option, so you can determine which makes sense for your portfolio.
Consider Rental Income
There’s no doubt that you can charge more for a single-family home than you can for a multi-family property. However, collectively, a multi-family property will typically generate more income than a traditional home. This is simply because you’ll have more units to rent out.
Multi-family properties are also advantageous because, with more units, you have a lower chance of being left without tenants. It’s highly unlikely that all of your renters will move out at once, which means you can avoid negative cash flow due to vacancies.
Understand Your Role
No matter what role you aim to play in managing your portfolio, it’s important to know the difference in terms of what’s required of you. For example, single-family homes are typically easier to maintain than multi-family buildings. In many situations, investors must consider what goes into maintaining each structure to determine the worth of the investment.
Moreover, multi-family properties can be more challenging to manage. Unless you hire a property management company, you’ll be responsible for collecting rent, performing walk-throughs, and communicating with tenants. Professional help costs a bit more and should be factored into your projected expenses before you follow through with a purchase.
Anticipate Financing Concerns
Many real estate investors utilize financing to purchase their properties. If you plan to do this, you’ll need to consider the differences in single-family and multi-family dwellings. In most cases, it’s easier to secure financing for a single-family home than it is for a larger building.
With a multi-family property, you’ll also need to take into account the number of units present. Traditional financing, especially from federally backed programs, tends to apply to properties with fewer than four dwellings. If your building has more than four units, you may require a commercial real estate loan. This type of loan is often difficult to obtain, especially if you are a new investor.
Think About Appreciation Rates
When buying an investment property, it’s essential to think long-term. Most real estate appreciates in value over time. The amount of growth is dependent on the condition of the residence and the current state of the real estate market.
Renovations and upgrades apply forced real estate appreciation to your properties. Something as simple as finishing a basement can cause a single-family home’s value to rise. However, forcing appreciation of a multi-family building provides a bigger challenge. With more roofs to repair and kitchens to upgrade, for example, renovation costs will be significantly higher than they would be for a single-family property.
Which Option is Right for Your Portfolio?
For new investors, a single-family home is a great way to become acclimated with the industry. Once you have more experience and a stronger investment pool to draw from, it’s possible to move into multi-family properties where the income-earning opportunities are higher.
Nevertheless, diversification matters too. Often, it’s best to have more than one type of property in your portfolio.