If you’re in the market for investment opportunities, purchasing rental property can offer a big return on investment, but you’ve got to know where to put your money first. Should you buy a single-family property, a multi-family property, or both? The answer has a lot to do with how comfortable you are with investment risks, and even more to do with your real estate investment strategy.
Learn how single-family properties can be a better bet in the short run, and a why multi-family housing purchases offer both a bigger risk and a more handsome reward if you’ve got the time and the money. To better understand the pros and cons of single-family vs. multi-family housing purchases, a deep dive into the benefits and drawbacks of each can help with your decision.
Consider Your Exit Strategies Before You Bid
Prior to investing in a real estate, it’s really helpful to have an idea of your term length — the amount of time your money will be tied up in the property. Are you looking to diversify your investment portfolio as a real estate investor? Getting the optimal return on investment can be hooked directly to your goals.
If the idea of a long, slow progression of property value is appealing, and if you have enough capital to buy a number of apartment units, condos, duplexes, or townhomes, a multi-family buy may be exactly what you’re looking for.
When smaller amounts are going to be financed, getting a single-family home to rent out may be a way to achieve a shorter-term return. If property value conditions are right, and you’ve got a consistent, reliable tenant paying the rent, you really may benefit. Save even more cash by being your own property manager if you’ve got the time and know-how. By following these simple steps, your short-term exit strategy may pay off with improved property that can bring in thousands more when you decide to sell.
How Are Single-family Homes and Multi-family Home Purchases Alike?
Most investment property purchases, whether single or multi-family, have similar loan requirements. Real estate loans for rental properties are considered business loans by most lenders. As such, interest rates are typically higher than mortgages for first-time and private home purchases. And be aware that business tax benefits extend to real estate investment properties and rental income. You’ll be required to put at least 20 percent of the purchase price down, too. Whichever way you decide to go, you should look for investments that return at least 1 percent of the total purchase price per month to clear a decent profit.
How Are Single-family Homes and Multi-family Home Purchases Different?
Obviously, one of the biggest differences is the price. But that’s just the beginning. There are many ways multi-family dwelling purchases are different when compared to buying a single-family rental home. For starters, the assessment and valuation process isn’t the same. Single-family homes are assessed according to value of the property, while larger multi-family units are valued according to the amount of rental income they generate. Take a closer look at each option.
What Are the Pros and Cons of Purchasing a Single-family Home
When purchasing a single-family home, there’s a lot to consider:
You’re tenant dependent. You’ll be locked into a more limited income stream when your sole renter is your single source of income, and a vacancy of the home results in total loss of revenue.
Single-family homes can draw long-term tenants. Rental homes in neighborhoods with good schools, local parks and easy access to shopping areas are a good fit for renters that are ready to settle down and sign a multi-year lease.
Better short-term benefit. Homes offer a better exit strategy. Unlike owner-occupied dwellings, investing in a single-family home can out-perform the financial gains made by multi-family properties — in the near-term — because the home usually appreciates in value more quickly.
Insurance for single-family homes is cheaper. Because the value of the property’s less, so will your cost for insuring the space. Regardless of the landlord’s insurance policy you purchase for the space, keep in mind that your tenant’s items will not be covered by this policy. It’s important to either have a clause in your lease strongly encouraging or requiring them to get renters insurance. Check with your state and local codes to determine which action is right for your area.
What Are the Multi-family Home Purchase Pros and Cons?
While a multi-family costs more, a long-game strategy potentially pays big dividends, but you’ll be spending more too:
Property taxes are higher. This cost is usually passed through into the rental fee, though high vacancy rates could mean you’re paying some of this expense out of pocket.
Long-term benefits are more likely. When you buy multi-family home rental properties, you may find the property appreciates more slowly compared to rental homes. But overall, if rents increase year over year, you may see a healthy profit upon selling.
Better distribution of mortgage-paying income. Because multiple tenants act as your source of income, you’ll benefit from a distributed risk that extends across all tenants. This offers a safer income stream potential because it’s unusual for all units to be vacant at the same time. Monthly passive cash flow may likewise be greater here.
Expect higher turnover. Multi-family dwellings draw typically higher-risk tenants versus those that apply for single-family homes. You may experience more frequent vacancies with this type of purchase. Costs related to finding new tenants could be higher too.
Multi-family insurance rates are higher. Although coverage for multi-family dwellings are usually more costly, you may be able to write off some or all of this business expense.
Upgrades pay off better. The landlord can upgrade the space to maximize rental prices, driving up valuation and helping to ensure a better resale value.
Multi-family properties are typically more difficult to sell. The valuation process for larger multi-family dwellings is based more on the amount of rental money it can potentially generate and less on actual property value. If you do find yourself in need of selling a similar property, it may be difficult to find a buyer.
What’s the Best Strategy for Investing in Profitable Rental Property?
Figuring out which of these rental properties is the right investment for you all boils down to where you’re most comfortable. Both can be profitable. Rental income has a proven track record of building wealth, and if you weigh out stability versus risk correctly, you’ll find the option that fits your finances and your comfort level best. As you explore your investment opportunities, check in with your American Family Insurance agent and review the coverage options available to you. You’ll find our expert agents make insurance easy to understand, and you’ll have the protection your investment needs.
This article was originally published on American Family Insurance.