Rental real estate investments in the forms of investing in multifamily properties and single family homes are the types of investment that have become dominant in the field of real estate. Travelling has become easier and faster during the years, which generated the need for the new generation to keep moving and never settle down. As a result, renting homes instead of buying them is now considered more practical because it allows tenants to lead a more flexible life. A recent Census Bureau report shows that the number of house ownership in the US has declined to its lowest point since 1965.
When it comes to the benefits of real estate rentals, it is considered a two-way street for tenants and landlords. Landlords are benefiting hugely from this trend, as they are collecting additional monthly rental income and appreciation of their real estate properties. In this article, we will shed light on investing in multifamily properties and why it could be a better investment for you as a real estate investor than investing in single family properties.
Related: Multi Family Real Estate Investing: Is This the Right Strategy for You?
What Are Multifamily and Single Family Properties?
First of all, let us give you a brief definition of multifamily properties compared to single family properties, to help you understand better the difference between the two.
Multifamily properties (aka apartment complexes) are residential properties that have two or more rentable units. Each unit has a separate kitchen, bathroom(s), living rooms, etc.
Single family properties, on the other hand, are residential properties that have only one rentable unit. This unit has no shared walls and could be a condo, a townhouse, etc.
Advantages of Investing in Multifamily Properties:
Now let’s move to the reasons that make investing in multifamily properties better than investing in single family ones.
Investing in multifamily properties has the following advantages that can convince real estate investors to explore the option of buying multifamily properties for financial gain:
1. Bigger Cash Flow:
When you are investing in multifamily properties, you can expect bigger cash flow because you will be buying more units with a lower price, unlike single family properties. Also, you will be receiving rental income from different tenants instead of one, which means you will be gaining more revenue from the same investment.
On the other hand, investing in single family properties generates a single monthly rental income coming from one tenant. In addition, by investing in multifamily properties, you will have a higher rent-to-price ratio compared to your single family properties investments.
2. Economies of Scale:
Investing in multifamily properties is better than investing in single family properties due to the economies of scale. In multifamily investments, there is a cost advantage that comes from the relationship between quantity and fixed costs. Utility costs, for example, do not double by doubling the number of units. Therefore, the larger the number of units, the lower the effect of the fixed cost due to the fact that it will be spread out over all the units. Real estate investors can get discounts on maintenance and repairs because there are multiple units, and therefore you can get a cheaper rate per unit. However, in single family homes investments, you will not be enjoying any of these cost advantages because you only have one unit and one tenant!
3. Bigger Value Control:
Another advantage of investing in multifamily properties is related to the property value. Because multifamily properties’ landlords receive multiple incomes from their investments, they are increasing the value of their properties. Thus, investing in multifamily properties generates bigger profits than single family properties.
4. Broader Range of Tenants:
Investors in multifamily properties can enjoy a broader range of tenants, because the per unit rental cost is usually smaller than it is with single family properties. In single family home investments, vacancy of the property hurts the landlord financially and deprives him/her of the monthly income entirely.
However, investing in multifamily properties means you will be receiving rental income from more than one tenant, and one vacant unit won’t result in a huge loss of revenue. You will also be able to maintain and repair the vacant unit without worrying about the repair costs, because the monthly rental income from the other units will cover these expenses.
5. Efficiency and Better Management:
Investing in multifamily properties is easier than investing in single family properties with regards to the quantity and the time and effort it takes to acquire one over the other. For example, it is easier and faster to invest in a multifamily property that consists of 10 housing units than looking for and investing in 10 different single family properties. In addition, when it comes to management, it is usually more effective and cost-efficient for multifamily investments. Again, any maintenance and repairs made in the multifamily properties can help raise the value of all property units.
6. Faster Way to Build a Portfolio:
Real estate investors who aim to build a large rental units portfolio should be investing in multifamily properties, as they will be saving time and effort to get to their desired destination in the world of real estate investing. Buying an apartment building can be more efficient because you will looking for one property with multiple units to purchase instead of multiple single units in different locations. Dealing with multiple units means dealing with multiple sellers and having multiple inspections conducted instead of one seller and one inspection for one property with multiple units. It also means that you will be avoiding getting separate loans for the different properties.
7. Easier to Finance:
Because of the strong cash flow generated every month, investing in multifamily properties are more likely to be approved for a loan than single family properties. In addition, a foreclosure on a multifamily property has a lower chance of happening due to the fact that one vacant unit does not strongly affect the monthly rental income of the whole property. This means that the lending institutions won’t feel like they are making a risky investment by lending money to a multifamily property landlord. It also could mean that the landlord will be enjoying a more competitive interest rate.
Related: Understanding Multi-Family Investment Property Returns and Benefits
Disadvantages of Investing in Multifamily Properties:
If the above-mentioned advantages of investing in multifamily properties were very convincing to you as a real estate investor and a future landlord, it is only fair that we introduce you to the few disadvantages of investing in multifamily properties to help you make an investment decision that is well studied.
Here are the main disadvantages of investing in multifamily properties:
1. Maintenance:
Due to the higher chances of wear and tear as a result of more people living in the property, maintenance costs tend to be also higher. There will more repairs and appliance replacement than in a single family property.
2. Harder to Re-Sell:
Because of the smaller pool of buyers, multifamily properties are harder to re-sell than single family homes.]
3. Slower Appreciation:
Multifamily properties tend to appreciate slower the single family ones.
Related: Multi Family Real Estate Investing: Debunking the Myths
Bottom Line:
Investing in multifamily properties is a good real estate strategy for investors due to its multiple financial benefits. Owning rental properties is one of the best real estate investment choices because it generates good monthly rental income and adds value to the property. For more information regarding real estate investments, you’re welcome to dig into the sea of information Mashvisor provides to you in order to make your real estate investment decisions wiser and your mind and pocket richer.