It’s undeniable that real estate is a solid investment. The tax advantages and the fact that property keeps pace with inflation alone make it attractive to those looking to diversify their portfolios, but the difficult part is choosing which type of real estate to invest in.
There’s an age-old debate about the practicalities of investing in multifamily vs. single-family properties, and the truth is that it’s completely dependent upon who’s doing the investing. If you are attempting to determine whether to buy a house or apartment for investment opportunities, let’s take a look at the advantages and disadvantages of each below.
The Pros and Cons of Investing in Single-Family Properties
A single-family property is a home, be it a condo, a house or a townhouse, that houses only one family at a time. This type of investment comes with its own set of positives:
- It’s cheaper. One huge advantage to investing in a single-family property as opposed to a multifamily property is the cost up front. Investors must put down a 10 to 15 percent down payment on a single-family home, unlike the 25 to 30 percent down payment that would be required for a multifamily home. Insurance rates will be much more manageable as well, and tenants are typically responsible for the entirety of the utilities as well as aspects like landscaping.
- It’s easy to slowly build to your portfolio. For first-time investors who are using their own financial resources, investing in single-family homes can be a way to slowly and steadily add to your property at a rate that you’re financially comfortable with.
- It can bring in higher returns. Single-family homes have the potential for extremely high returns — to the tune of 20 percent or more. Appreciation rates are typically higher as well, as there will always be a demand for single-family properties provided that they are well-maintained and in good areas. This makes investing in single-family homes the perfect model for individual investors seeking slow and steady growth.
Investing in a single-family vs. multifamily property also comes with negatives that aren’t to be ignored:
- It’s difficult to amass large quantities. For an investor looking to quickly grow his or her real estate portfolio, single-family homes may not be the way to go as it takes a considerable amount of work to find and purchase properties. Rather than multiple units that come with a multifamily property, an investor in single-family homes will only gain one dwelling with each purchase.
- They’re more difficult and costly to manage. Once an investor has a significant amount of properties, the management of each one becomes more difficult than having all of the units on the same site. It’s also important to note that most professional property management companies will charge around 10 percent of the monthly rent to manage a single-family property, while that figure is around 4 to 7 percent for an apartment building.
- A vacancy results in a total loss. When a renter moves out of a single-family home, the property will be a complete economic loss until someone else moves in. This can be especially tough to offset if you’re still paying the property’s mortgage.
The Pros and Cons of Investing in Multifamily Properties
A multifamily property typically refers to an apartment building and, while sometimes more intimidating to investors, can be extremely rewarding. Some of the advantages of investing in this type of property include:
- They cost less per unit. While the cost of the overall property will most likely be greater than a single-family home, each unit will generally be cheaper than purchasing a house. For an investor who wants to be collecting rent from many dwellings, a multifamily property such as an apartment building may be a better long-term investment.
- The operating expenses are lower. The purchase of a multifamily apartment building typically includes the cost of a professional management company, which gives investors the freedom to be less hands-on in terms of maintenance and management. This means less worrying about rent payments and contracting out labor for upkeep and more focusing on the bottom line.
- One investment leads to multiple sources of monthly income. While it may be more difficult to come up with the financial freedom to invest in a multifamily property, the gratification can be immediate. As soon as you’ve made the purchase, you immediately have access to not one but many sources of income.
Potential challenges with investing in a multifamily vs. single-family property are:
- It may take longer to find a good investment. It’s typically going to be more difficult to find a solid multifamily property to invest in as opposed to a single-family home. This may mean require more time and patience, which can be difficult for an investor who is eager to begin.
- Multifamily properties are more expensive to purchase. In most cases, the upfront costs associated with purchasing an apartment building are going to be much greater than buying a single-family home. This does not, however, mean that multifamily properties are out of reach to most individuals. Remember that you can raise money from others to invest in an apartment building.
Single-Family vs. Multifamily Investment Properties
In the end, it can be an amazing choice to invest in real estate, no matter what you determine in the single-family vs. multifamily debate. However, it can’t be denied that investing in a multifamily property will ultimately produce greater returns for the investor. To learn more about multifamily property investments and how to get started, please schedule a time to meet with CTG Real Estate services today.