Multi-family versus Single Family Home Investing

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Perhaps one of my most interesting AHHa’s I have received working with so many different investors is the different investing objectives that investors have. These different investment objectives often results in much confusion and debate over investments. Often these debates get downright nasty as everyone is busy trying to convince you their investment choices are the best investment options available to all of mankind. You have to chuckle at the nonsense. As investors we are supposed to approach investments analytically and your investment choices are best served doing this as well.

Which is better investments Single family or Multi family.

Single family homes tend to provide less cash flow on a monthly basis. However the typical exit strategy is to sell to the end user (retail buyer) so the equity growth tends to be much stronger over time.  

Multifamily homes tend to offer stronger cash flow today.  However the typical exit strategy is to sell to another investor (a cash flow buyer) so the equity growth tends to be less.

Ask yourself these questions.                            

·         What type of properties are you most passionate about: are you more comfortable with fewer tenants in single family neighborhoods or into mass production of multiple tenants in high density neighborhoods

·         Are you investing for strong cash flow: stronger today income that results in less equity growth for future

·         Are you investing for strong equity growth: stronger future Income from equity growth with less cash flow today

·         What level of property management do you wish to undertake. While a property management commonly may be hired to run the properties in either case, there are still a number of management considerations to take into account for either investment.

Clearly neither investment is the best, the question is which is best for you? The best investment for you is one that best fulfills your objective and investment strategies.

Single family or Multi- family, lets break it down with the top 3 Pros and cons for each.

Single family pros:

1. Fewer turnovers; tenants tend to call a single family (their home) they tend to own more things and as they are happy in their home with more belongings they tend to live there longer. This equates to less tenant turnover and less expenses for the owner.

2. More controlled expenses: On a single family rental the tenants typically pay for all utility expenses. The only expense paid by the owner are the standard taxes and insurance (perhaps a mortgage) this provides for more predictability over the cash flow.

3. Higher equity growth: Appreciation is one of the best wealth building principles and tends to be best captured in the single family market. The best equity growth position will of course be the property that will sell to a retail buyer at the time you sell. Retail buyers are buyers who want to buy for themselves  to live in. The single family home has always been the most highly sought after and liquid real estate investment class. Obviously buying the right property in the best market for equity growth position is paramount to capitalize on this equity growth.

Single Family Cons:

1. One tenant: (on lease) when the property is vacant there is no revenue coming in. Another reason location is so important. Always want to own rental in a highly sought after location where housing is in highest demand.

2. Price per unit: the cost per unit (commonly referred to as per door cost) is higher than the per door cost of a multifamily property. This higher (per door cost) often reduces the cash flow on a per door basis.

3. Higher repair costs: with one unit there is no economy of scale pricing so repairs can be more expensive. Property management fees may be higher as well.

Multi-family pros:

1. Economy of scale pricing: with multiple units you can often get better pricing. Better price on property management as well as repairs.

2. Financing: Loans for Multifamily properties are tied to the financial merits and performance of the property. When buying one to four unit properties the loan is considered a conventional loan and these loans will be tied to your income and credit worthiness, usually requiring great credit scores. . When buying 5 unis and larger, these are considered commercial loans. They rely on the financial merits of the property as opposed to your personal income and expenses.

3. Higher cash on cash returns: when seeking higher cash on cash returns, Multi- family delivers. Economies of scale are working for you, For example You have one roof that may needs repair which covers multiple paying tenants to help pay for that repairs. Or you have multiple units to manage so a property manager may discount the fees.

Multi-family Cons:

1. More transient tenants: one of the largest expenses to the owner is the turnover cost of tenants. Apartment dwellers tend to be smaller families or individuals who move more often. Resulting in higher cost and less predictable returns.

2. More tenant issues: the more people living under one roof the more domestic challenges you encounter.

3. Additional maintenance cost. All common areas such as hallways maintenance, paint, electricity and cleaning as well as lawn care and snow removal (where applicable) are the owners cost. These costs reduce the controls the owner has over expenses.

As you can see there are pros and cons to both investments. Deciding what is most important to you will help you narrow down the best investment for you.

Your conclusion:

Who tends to buy the single family investments: the investor looking for a nice passive investment where they can hire a property manager and not have to worry about a variety of issues arising. These investors simply want a nice safe and sustainable investment secured by real estate. They have a larger desire for a nice mix of cash flow and equity growth.

Who tend to invest in multifamily investments: this investor tends to be more actively involved in the investment. Even with a property manager they understand they will have to be involved with the decision making process to the variety of items that arise from the number of units they own. This investor tends to have a bigger desire for cash flow than for equity build up as the values of the building is tied to the rents that are generated.

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