If you’re interested in investing in real estate, determining which property type best fits your current situation and your future aspirations, is a major first step. Typically, there are two options: single-family residence VS Multifamily residence.
Single-Family residence (SFR) is investing in a property that is a traditional home for a single family. This could include buying and renting right away if the house is in good condition, rehabbing the property and renting it out for a higher price, or renovating the house and selling it in a short time frame. For Multifamily residences (MFR), one would be investing in apartment buildings, condos, or duplexes and triplexes. These properties are typically held and rented.
Let’s go ahead and break down the benefits and drawbacks of each of these types of real estate along three categories: financing, tenants, and maintenance. This will give you some of the information you need to make an informed decision about which property type works best for you!
Let’s start with a single-family residence or SFR. SFR’s are great for first time investors because they typically are more plentiful and accessible.
- Financing SFR’s: With this option, financing tends to be simpler. First off, these properties tend to be less expensive, meaning they will require less money down. They also require a residential mortgage vs a commercial loan. Residential mortgages usually have looser underwriting standards and are more accessible. On the flip side of that, SFR also have great resale value. Not only is there a larger market of folks who are looking to buy SFR for their own families, but you could also sell to fellow real estate investors. This broadens your pool of potential buyers greatly.
- Tenants: Typically, with a SFR, you have longer rental agreements reducing the amount of tenant turnover and you can have stricter criteria for your renters. Since you are only looking for a single tenant, it is easier to manage the rental by yourself and you can spend some extra time ensuring that the tenant is a ‘good fit’ for your property. In a previous blog post, we discussed the increasing millennial population in Indianapolis. This demographic is a large and growing pool of renters, meaning the need for rentals, especially in Indy is growing! There will be a constant need for SFR rentals and so it makes it a less risky investment. Having good tenants is an important aspect of your real estate investment success. Less transition, means less vacancies, means less money lost, and less damage to the property as folks who tend to look for SFR have families or are treating the property as their own home.
- Maintenance: Now let’s consider the maintenance of a SFR. Since you are having considerably less tenant turnover, maintenance will also be less of an issue. There is always going to be a level of routine maintenance for any property, but considering you are only working with a single residence property, you can avoid having to make improvements on multiple units at the same time. Also, as touched on in the discussion around tenants, new data is telling us that some Millennials are starting to have kids and grow their families, so they are looking for properties to live in for the long term. Since for many Millenials, unfortunately, buying a home is not within reach, they are looking for SFR rentals that can fit their needs for the long-term and are therefore more incentivized to maintain the house as if it were their own. Lastly, if you are managing just one SFR or even if you have a handful in your portfolio, maintenance doesn’t necessarily have to be outsourced as it typically needs to be with MFR that have 20 or so units.
Now that we’ve broken down some of the key aspects of the SFR, let’s look into MFR to see if it is a good fit for your real estate investing goals.
- Financing MFR’s: While it’s always less expensive over the long-run to buy in bulk, typically you are looking at a much larger price tag for MF units vs SFR. With a MFR you are looking at a commercial mortgage loan vs a traditional mortgage. Commercial loans tend to be harder to qualify for, needing a larger down payment, more in cash reserves, and even a proven track record in real estate investing or property management. However, financing can vary widely and if you work with the right lender, you can usually find creative lending options that best fit your needs. On the flip side of that, resale value for MFR is often not as high as SFR since you are looking at a higher price tag and a smaller pool of buyers who are typically real estate investors themselves.
- Tenants : With a MFR, you are typically looking at multiple units needing to be filled. With larger apartment complexes this number can be as large as 20+! Compared to a single tenant, this can often be daunting. Keeping the rentals occupied is so important for your cash flow, so this will also impact the quality of tenants you are willing to enter into rental agreements with. You might lower your standards to ensure that your rentals are full. Also, the tenants that you attract tend to be younger or older and are either individuals or small families. These demographics are typically looking for shorter-term rentals to align with their needs. Also an added value to MFRs is the potential to live in the unit you rent out yourself. This removes the need for a personal mortgage if you don’t mind living with your tenants.
- Maintenance : First off, it’s important to remember that more tenants will usually lead to more wear and tear. This tends to increase the amount of money spent on general maintenance. However, there is a benefit to fixing common areas of the unit that adds value to all units. For instance, replacing the roof will benefit all of the units in the building. This is also true for things like insurance or property management services, when you have a single property with many units, it’s still a single property. This also adds into the increased need for outsourcing things like property management or maintenance services. This added cost can be a deal break for someone looking to do a more DIY approach to their real estate investing, but typically these companies charge per unit which is a lower cost overall vs many SFR properties. So which one will you choose? Overall, which option to choose is solely based on your current needs and your future goals. Hopefully, this breakdown of the differences and similarities between Single-Family Residences and Multifamily Residences gives you more information to make your decision. Just know, at the end of the day, whatever option you chose, having a flexible and creative lender is key to securing your properties and building a diverse portfolio of properties to build long-term investing success.