Are you planning to enter the real estate market? From the outside, one might think that this industry is all about buying and selling houses. Well, that’s the main purpose, but there is a lot that goes on behind the scenes. Therefore, before you join the rest of the investors, it is better to familiarize yourself with the basics. For one, you should be aware that there are various types of property in which you could invest your savings.
Perhaps, the most common and, sometimes, daunting question is which one between single and multifamily rental property is better. Whether you are a new investor or an experienced one in the market, this is something that’s still debatable. One reason why there is no conclusive answer to this is the fact that the two options have their own benefits and drawbacks, depending on a number of factors. This article is going to analyze their differences so you can make an informed decision.
Of course, the first thing you should look out for is how much it will cost you to start up. As you’d expect, single-family rentals are less expensive than their multifamily counterparts. You can get into the SFR market with as little as $100,000 or even less, depending on where you are planning to set up. MFR, on the other hand, can cost more than a million dollars–remember, this is just a simple multifamily rental property. If you were to go for a bigger one, then, you’ll need even more cash. As such, you might be forced to go for commercial real estate loan to finance the project. So, in terms of capital, you might need to consult your bank accounts and see which option you can afford.
As they say, the more you invest, the more profits you reap. Both SFR and MFR are profitable, but their monthly returns vary. Unless you have several single-family rental properties, a multifamily property will generate more income. Regardless of your agreement with the tenant, it is expected that the amount received by MFR owners will be higher than that of SFR property.
At some point, you might lose a tenant, and this situation will hit differently on the two investors. For an SFR property, it will be 100% vacant, while a 10-unit MFR will only be 10% vacant. As such, the latter will still enjoy cash inflow even if it is 90% of what the property management company usually collects. However, this is not to say that MFR is a better investment than SFR. First, there is the issue of loans and other costs incurred during the start-up phase. Therefore, you might find that the overall return is lower than that of SFR despite having higher net cash flow. Another thing worth noting as you decide between the two is the fact that one has more tenants than the other. As such, MFR may experience more wear and tear because of hosting more people. As time goes, you could find yourself spending more money to maintain the property, and that will drastically reduce your overall monthly returns.
This is another factor that most people ignore as they start their investment. It will not matter at first, but, at some point, you might need to resell the property. Doing so requires you to negotiate reseller agreement terms and follow several other complex steps. Well, single-family homes are easier to market than MFR. In real estate, one barrier to entry is the property’s price. Here is where SFR wins because it has a lower price tag, which, in return, attracts more buyers. You can sell them to traditional home buyers or investors.
The main aim of investing in real estate, or any other industry for that matter, is to make more money. As such, you’d want to invest in something that has high demands. In recent years, single-family rentals have become an attractive option for most new buyers. Among the main factors leading to this choice is the high student loans. When one is trapped in such a situation, the only reasonable option is to look for a cheaper house, which is why they end up buying SFRs. The demand for MFRs is constantly dropping because of their prices.
Investing in real estate requires enough knowledge of the market. Whether you decide to put your money in a single-family or multifamily rental property will depend on your financial ability. Both options have their benefits and drawbacks. Therefore, it is better to research each one of them before you decide to invest. Despite being expensive to start, MFRs increase your monthly income more than SFR. Their maintenance is, however, quite an issue, and you should keep this in mind as the investor.