Should You Invest in a Single or Multi-Family Rental Property

If you’re ready to invest in a rental property and are looking to make your first purchase, you’re probably wondering if you should invest in a single-family home or a multi-family property. Each type of property brings a unique set of challenges to the equation and can provide benefits in your pocketbook and portfolio. Let’s dive into the pros and cons of each so you can better discern the option that might be best for your unique investment situation.

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Rental Income

On the surface, this one may seem obvious, but it’s actually a much harder decision for a lot of people than they realize it will be. With a multi-family property, you’ll still have the ability to have income coming in, even if one or more of the units are under renovation or vacant for some other reason. You can upgrade a unit, take it out of commission for repairs, or endure the time in between renters without completely halting your income stream.

A single-family home doesn’t afford you this luxury. Instead, if the house does not have tenants, it’s simply not making you any money. That means you’re on the hook for the mortgage payments and may need to dip into your savings while you prepare and advertise your property to potential new renters.

While you’re less likely to face a $0-income month with a multi-family property, that’s not the only thing you should consider as you set forth on your buying journey.

Financing

Single-family homes tend to be significantly more affordable than multi-family properties. Besides the price tag itself, financing is typically easier to obtain for single-family homes than multi-family properties. This, in conjunction with the fact that down payments and interest rates are usually lower for single-family homes, makes this type of property particularly attractive to new investors who are just getting started in the rental property game.

Regarding multi-family units, if the property has more than five dwellings, it’s considered a commercial property, and you’ll need to apply for financing that falls under that umbrella. Lenders will want to see your track record with prior investments and review your past experience as a property manager. Commercial loans often require a higher down payment; you should expect to be required 25% as opposed to 20% for a residential loan. If you’re just getting started as a property investor, obtaining commercial real estate funding will likely be an uphill battle. In that case, you’re best to shop for a single-family home or a multi-dwelling property that has fewer than five units inside it.

There is one major consideration to take into account when considering multi-family options: should you live on-site? There are benefits to doing so, including reducing your overall expenses by having your tenants cover your monthly fees. It may also be easier to get a loan if you plan to use one of the units as your primary residence, particularly if you’re planning to go with a conventional mortgage via Fannie Mae lender. The down payment for a primary residence might be lower than it would be otherwise, should you choose not to live in the property.

Maintenance, Repairs, and General Property Management

The 3:00 am calls can get pretty old, pretty fast. When you own a single-family house, you’re mitigating the risk associated with maintenance calls and repair needs. The more units and tenants you have, the more possibilities you have for problems to occur, whether they’re related to normal wear and tear or disrespectful renters. In either case, you’ll only have one roof to maintain, one HVAC system to keep tabs on, and one exterior to deal with. Inside the units, however, you could be forced to deal with multiple issues that may or may not be related from unit to unit.

While it’s not impossible to manage multiple units simultaneously, many new landlords discover that it’s more difficult than they gave credit to at the onset of their buying journey. This is where experienced property management companies come into play. Property management companies handle an assortment of problems and issues, so you don’t have to spend your days dealing with them yourself. This often includes (but is not limited to):

  • 24-hour emergency maintenance
  • Leasing services to ensure both you and your tenants are legally and adequately covered
  • Move-in and move-out reports to keep you and your tenants on the same page throughout the lease and beyond
  • Compliance requirements, such as lead paint certification and rental registration within the appropriate jurisdictions
  • Marketing vacant properties
  • Screening tenants
  • Eviction services

While property management services certainly service both single- and multi-family dwellings, the more units you have, the more benefit you’ll realize from the assistance of a professional property manager. With that said, even a single-family home can bring a lot of things many new landlords don’t even realize they’re expected to know. Compliance with local and federal regulations, for example, is a full-time job that requires one to be entirely up to date on the ever-changing landscape of legal requirements. This is nearly impossible if it’s not your sole function; property management companies, on the other hand, hire people whose jobs are literally to keep an eye on all applicable laws and regulations and ensure their clients’ properties are within the confines of the law.

Every investor’s situation is different, and the type of property that’s best for one person won’t necessarily be the best for someone else. By understanding the intricacies involved with financing, property management, and other elements involved with the rental investment business before you start shopping for your property, you’ll be more equipped to operate a successful rental business.

About Mohit Tater

Mohit is the co-founder and editor of Entrepreneurship Life, a place where entrepreneurs, start-ups, and business owners can find wide ranging information, advice, resources, and tools for starting, running, and growing their businesses.

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