Suppose you are in the market for a new house, whether as a primary residence or an investment property. You will have an important decision to make. Do you want to get a single-family home or a multi-family property? Of course, each has benefits and drawbacks. So, we will compare single-family vs. multi-family properties to help you decide what is best for you and your goals in this article.
What is a single-family home?
As the name implies, a single-family home is for a single-family. There is one front door and typically one kitchen in a single-family house since there are no separate units within the home. It’s the traditional style of home.
What is a multi-family home?
A multi-family home is designed for multiple families to live in. Typically there are numerous front doors and kitchens, as they are specific to each unit. While the house may be a single structure, they build it to allow multiple families to occupy different units independently.
Duplexes, triplexes, quadplexes, etc., are different multi-family home options. Instead of retrofitting a single-family home into a multi-family property, they design these structures to house multiple families. In addition, multifamily properties allow for more cash flow as you collect rent from various tenants instead of just one.
The vital distinction concerning multifamily properties is that each unit operates independently. This means a separate entry door, kitchen, living space, etc. For example, there are two homes under one roof in a duplex. They could be side by side, or one unit could be on top of the other unit. In a triplex, there are three units. Quadplexes have four units, and so on.
Similarities and Differences
Buying a home is a big decision, regardless of whether it is for you to live in or if it is an investment property. A lot goes into the decision, from the down payment and monthly costs to repairs and maintenance.
Securing a traditional mortgage is just one part of the home buying process. Taxes and insurance are also part of the total cost of homeownership. Therefore, you should consider these things from the beginning when buying your property.
Typically, multi-family homes are larger because they design them to house multiple people in separate units. However, this is not always the case. Sometimes, a single-family home is modified to create a duplex. In this case, the property’s square footage is not more significant than the traditional single-family home.
Multifamily properties such as quadplexes or apartment buildings are much larger than single-family homes. The square footage is essential to consider the heating and cooling costs.
Multifamily properties are unique in that you will need a specific type of renter to want to live in a multifamily home. Many families are hesitant to share a wall or a floor with others, especially if small children are in the house. Such a living arrangement is similar to apartment living, where sound and noise complaints can be an issue.
Additionally, if there are numerous units on the property, the benefits of living in a house may not be present. For example, having outdoor space for kids to play or the dog to run may be a compelling reason a person wants to rent a house. In this case, they may prefer living in a single-family home without concerns about rowdy neighbors or finding a parking spot.
Single-family and multifamily homes are similar in that they both have traditional elements included in a house, such as bedrooms, a kitchen, and a living room. The difference comes with how many living arrangements are on the property.
As you consider your purchase, here are seven questions to ask yourself to help you decide on the best type of property to buy.
Is Separate Space Desired?
Several critical purchasing considerations are required if you consider purchasing a property as a primary residence. For one, do you prefer your own space separate from others? If so, a single-family home will be the better option for you. However, if you do not mind being near others, you can offset some housing costs if you buy a multi-family property.
If there are other units available to rent out, you can house hack, meaning your renters would offset the cost of your mortgage. This allows you to reduce or even eliminate your monthly house payment. The rental income covers the mortgage on the property.
What is Your Investment Strategy?
If the property is purely an investment property, you need to consider your investment strategy. Multi-family properties have higher purchase prices and maintenance costs due to the multiple units. This means you will need a larger down payment and cash reserves to prepare for potential issues with the larger property.
What Works Better in the Local Market?
When making your purchase decision, you should also consider the local market and investigate what rents better in your area. While some people prefer a single-family house, many others do not mind having more than one unit nearby.
Different property types will appeal to different people. Do your research to see what rents better in the area. For example, check how long the properties stay on the market and the difference in rental income for a single-family house versus a unit in a multifamily property.
Real estate investing is not for everyone, but money is to be made if you do your research and buy rental properties after running the analysis. However, real estate investors know that not all markets are created equal. So, it is essential to do your homework on the area you are considering purchasing a property.
If the area is full of young families or working professionals, such people may prefer renting a single-family home. However, a multifamily property may be more appealing if it is a college town or an area that people typically transit through. This is why it is important to analyze the real estate market before deciding.
Are You Prepared for Vacancy Costs?
Vacancy costs are also essential to consider when becoming a landlord. For example, if you purchase a single-family home and the tenants move out, find new tenants before the property generates any revenue. Otherwise, you are left carrying the note on your own due to zero rental income.
However, with multifamily properties, more tenants are still paying rent and contributing to the mortgage on the property if one tenant moves out. This can make investing in multifamily properties less risky than a single-family home in the unfortunate event that a unit sits vacant.
If you rent out a quadplex and one unit sits vacant for a month, you still receive 3/4 of the rental income to go towards the note on the property. However, if a single-family home sits empty for a month, you receive zero rental income from contributing to that property’s mortgage.
If you opt to buy a single-family home, consider vacancy costs. In this case, it’s essential to have a larger cushion in your business account or a business emergency fund to cover the rent. Don’t worry though, this is only for the unfortunate event that you can’t generate rental income in a particular month.
What Type of Cash Flow Are You Seeking?
A real estate portfolio can include various properties, ranging from single-family homes to an entire apartment building. A multifamily investment strategy provides better cash flow due to the number of doors or units you can rent out. While the principal on such a property will be larger, multiple renters contribute to the cost of the property.
This strategy can have a higher monthly cash flow, but it comes with a more significant initial investment. This is important to consider as you weigh your options for single-family investing versus multifamily investing.
The difference between the rental price and the mortgage note is more limited in a single-family home. This is because just one tenant is paying for the entire property. However, you can still find great deals. With the right connections, you can find single-family homes with cash flow of up several hundred dollars per month.
While renting out a single home will probably not produce enough income to replace your day job, it can add a nice cushion to your monthly income. In addition, especially if you are beginning your real estate investing journey, you may find buying and maintaining one single-family house easier than jumping into multifamily rental properties.
Will You Hire a Property Manager?
Another important consideration is whether you will use a property manager or if you plan to manage the properties yourself. If you have several properties, this can be a challenge to maintain on your own. However, a property management company can help collect rent, schedule maintenance, and find and screen tenants.
While this service comes at a cost, typically a percentage of the rental income each month, it also takes a lot of work off your plate.
If you opt to invest in a market not near where you live, a property manager will be an invaluable asset. This will keep you from having to drive or fly to visit the property regularly, and you will have a local person on the ground available to assist tenants with any problems that arise.
You may prefer to be more hands-on with your rental properties, which is fine. Just recognize that it comes at a cost. You save money by not paying a property manager will cost you time.
If that is a trade-off that you are okay with, managing your own rental property or properties can be an exciting undertaking. They will keep you more connected and aware of what is going on at the property. This is better than getting second-hand information from a property management company.
The more tenants you have, the more potential issues or problems to address. As your rental property portfolio grows, you can choose to outsource it to a property management company. The great thing about this is that you are not locked into your decision.
As the real estate investor, you are the boss and can decide what is best for you and your business at any point in time.
Do You Plan to Sell Off the Property?
Multifamily rentals, including apartment buildings, are a great way to earn more money than you could from single-family rentals potentially. However, when it comes time to sell the property, you may have a larger buyer pool for a single-family home. These tend to be more desired among homebuyers who are not seeking investment properties.
However, do not let that deter you. New investors may not have the capital to buy multifamily units. So, starting with a single-family property could be just what they need to begin their real estate investing journey.
As part of the research, you conduct on the local market, be sure to investigate how houses are selling, not just how they are renting. For example, do houses tend to sit on the market for a while, or do they move quickly? In addition, analyze the available offerings of both single-family homes and multifamily properties.
Is there a lot of supply? Do they tend to sell for more than the list price? Of course, these elements change over time, and there is no guarantee that what is happening in the market now will be the case when you sell your property. Nevertheless, it can give you an indication of how the market is in the area.
Why Should You Buy a Single Family Home?
If you are ready to take the plunge into homeownership and have carefully weighed the costs, buying a single-family house may be the best option. It grants you autonomy and independence. In addition, there are more properties available in this style. Plus, they are typically cheaper though this depends on the square footage of the house.
If you are a real estate investor looking to add to your portfolio, single-family homes will attract many renters seeking a change from apartment living. They offer the tenant an opportunity to live independently. In addition, they won’t have the burden of a mortgage or being responsible for house maintenance and repairs.
There will be a larger buyer pool for a single-family home when it comes time to sell. As a result, the house could be attractive to both real estate investors and those looking for a personal residence. This allows for more potential buyers who could drive up the sale price.
Related: What is a Spec House?
Why Should You Buy a Multifamily Property?
If you have more money to invest, a multifamily property can be the better option. It provides the opportunity to generate more cash flow. Even when there are vacancies, the ability to still collect partial rent on the property helps.
Single-family vs multi-family FAQ
What is the difference between a single-family and a multi-family?
A single-family home is designed for just one family to live in it. A multi-family property is something like a duplex or quadplex where there are multiple separate units for different families to live in on the same property.
Do single-family homes appreciate more?
Single-family homes tend to appreciate more than multi-family properties due to the demand for more single-family homes, which can drive up the price.
How can you distinguish mobile manufactured and multifamily homes from a single-family home?
A single-family home typically only has one kitchen, whereas multifamily homes will have multiple kitchens so that each unit has one.
The post Single Family vs Multi Family Home: Which is better? appeared first on Millennial Homeowner.