When it comes to real estate investing, there are many different methods and approaches. However, if you’re looking for long-term passive income, it all comes down to single or multi-family rentals. It is possible to achieve positive cash flow from either one, but there are some differences between them that every investor should be aware of before purchasing any property. Here’s a quick look at the benefits of both single and multi-family real estate investments.
First of all, single-family houses are much easier to find than multi-unit properties. There are many more of them on the market at any given time and there’s no shortage of reasons why a homeowner may want to sell. There’s a good chance the first good deal you come across will be on a single-family house.
Single-family houses are also easier to sell than multi-family properties because there are so many more buyers looking for them and plenty of financing options to choose from. Since most home buyers are looking for a place to live as opposed to cash flow, multi-family properties tend to change hands among a smaller pool of buyers. Owner-occupants tend to make their purchases based on emotion, so it often takes only a handful of cosmetic improvements to generate interest in a single-family house.
Another advantage of investing in single-family houses is stronger appreciation. There are many different factors that can influence this, including a property’s location. Multi-family properties are usually priced based on their rents, net profit and performance potential.
Single-family homeowners also tend to spend less on property taxes and insurance, since they’re only required to purchase residential insurance, rather than commercial insurance. Expenses like these can dramatically affect a property’s profitability.
Single-family houses are easier to finance and more reasonably priced. This brings them within easier reach of new investors, who may have trouble acquiring multi-unit properties. Although properties with 4 units are easier to qualify for than those with 20, their price tags are still higher than single-family homes. This can mean higher down payments and stricter credit requirements. For more information on purchasing single-family houses, visit www.watsonbullporter.co.uk.
When you break down the cost per unit, it costs much less to purchase one 4-unit property than it does to purchase 4 single-family houses. Even if they’re in the same neighbourhood and the rents per unit are roughly the same, the multi-family units are attached, sharing a single patch of land and other common areas. You will only have to come up with one down payment (and qualify one time) to purchase a 4-unit property.
Having multiple units in the same location allows an investor to consolidate their overhead and reduce maintenance costs. Not only can they all be managed by the same individual or company, but repair crews are also able to tackle problems that affect multiple units in one visit. The same number of single-family houses may require more than one property manager, especially if they’re spread out over a wide area. Additionally, multi-family properties sometimes have parking structures, swimming pools and fitness facilities to maintain that are not typically associated with single-family houses.
When it comes to a property’s income potential, cash flow is generated by each occupied unit, rather than the land it’s sitting on. Although the land will likely appreciate some by the time the property is sold, that’s considered a secondary benefit. From the perspective of a landlord, it’s a non-performing asset. The land-to-building ratio of a multi-family residence is tilted in favour of the building, allowing the investor to own more profitable units and less land.
Although tenants tend to stay longer in single-family houses, the property will be 100 percent vacant when they do leave. Keep in mind that the property’s expenses will still have to be met. Multi-family residences offer greater income consistency, due to the presence of the other units. Investors are generally able to offset their vacancy costs with the remaining rents, until the affected units are filled.
Most investors tend to hang on to multi-family properties for many years, but you may eventually decide to sell one and cash in. Fortunately, it will probably sell for a much higher price than the average single-family residence. The value of a multi-family property depends on how much income it produces and any improvements made to it can easily justify higher rents. Those higher rents can raise the property’s value quite significantly.
Remember, there are exceptions to everything and there will always be cases where the opposite holds true. Both single and multi-family units can be profitable investments, as long as the numbers work. There’s no reason you can’t make money off both types of properties, if you have properly analyzed their income potential.
Erin Sanderson is an active property investor. She likes to share her ideas on how to invest with an online audience and is a regular writer for a variety of relevant websites.