Any residence with two or more units in the same building is referred to as a multi-family property or multi-dwelling unit (MDU). This kind of home comes in various structures, including the,
All You Need To Know About Single-family and Multi-Family Home Investments
Dated: July 16 2020
Single-family homes and multi-family homes are two different types of investment properties. This post will attempt to distinguish between both by highlighting their similarities and differences. Let's start with the similarities.
How are single-family and multi-family home investments similar?
Interest rate and down payment. Either you are investing in single-family or multi-family homes, you should be prepared to pay, at least, 20% as a down payment. You may also pay high-interest rates. All of these may be too expensive for some investors. Fortunately, the interest and down payment rate is slightly lower when buying the property for residential use and not as an investment property. The higher risk associated with investment properties is the reason behind the banks' stricter conditions.
Excellent returns on investment. Both single-family and multi-family homes promise excellent ROIs in the long run. You can rest assured of earning more than 1% of the cost of property per month. This ultimately translates into positive cash flow. It is more advisable to buy either of these property types is recommended. Investors can use the rent income generated to pay off the mortgage expenses. Both offer tax benefits. As an investor, you get tax benefits on both single-family and multi-family homes. These may come in the form of mortgage-related tax deductions or property tax. Either way, you can be sure of saving some money on expenses. These are the similarities between single-family and multi-family homes. Now, let's consider the other side of the divide – the differences. How are single-family and multi-family home investments different? To do justice to this part, we will consider both investment options independently, starting with the single-family homes. Single-family homes are more affordable. As you will expect, the single-family homes cost less to invest in compared to the multi-family homes. The reason is not farfetched – single-family homes have lesser units than multi-family homes. Other contributory factors to the lesser investment cost of single-family homes include lower insurance rates (only one housing unit is covered), and the absence of utility expenses (tenants are mostly responsible).
Single-family homes appreciate more. The demand for single-family homes is higher in almost housing markets. This, in turn, favors the appreciation rates. The difference in appreciation rates is an important consideration for lenders. While lenders will value single-family homes solely on their supply and demand factors, they value multi-family homes based on the potential rental income and the condition of the property. The higher demand for single-family homes makes them the ideal choice for lenders. Single-family homes attract better tenants. Tenants in single-family homes see and treat the rental property as theirs. Therefore, they prioritize proper maintenance and communicate emergencies to the landlords promptly. Likewise, the turnovers of single-family properties are lower relative to other kinds of property. So, if you are a first-time investor, you have little to do as a landlord of a single-family home.
This allows you to settle easily into the real estate scene, unlike being in charge of a multi-family home, which can be difficult to manage without proper experience. Single-family home investments come with multiple exit strategies. As an investor, opting out of a single-family home rental property investment is very easy. You can get buyers faster and complete a sale for an excellent price, thanks to their higher demand by investors and families looking for a home to buy or lease.
Conversely, multi-family homes with low demand are difficult to sell off – only investors will consider them. Upsides of multi-family home investments. Now, let's move to the upsides of multi-family home investments. Multi-family home investments offer higher rental incomes. Investors are majorly attracted to multi-family homes because of the high rental income it offers. Each unit in a multi-family home property generates a considerable amount of money for the owners. These rental incomes are more than what is obtainable in single-family homes, with their single units.
So, if you are worried about getting the maximum return on investment or positive cash flow, multi-family home investments are the way to go. Multi-family home investments come with fewer vacancy issues. While vacancies are not totally exempted in multi-family homes, it hardly happens, and when it does, the associated costs are minimal. You continue to earn rent from other occupied units if one of the units in the property is not occupied. Conversely, single-family homeowners may experience negative cash flow if the unit remains unoccupied for a long time. Multi-family homes put the landlord in charge of the value.
It may interest you to know that multi-family homes are one of the real estate properties that are valued according to the rental income they attract. Hence, the owner of such a property, indirectly, determines the value of their property. If they can generate maximum rental income, their property becomes more valuable. So, it is all on the investor to make their property appreciate or depreciate. Single-family homes, on the other hand, rely on economic factors for valuation. Final Thoughts The choice of an investor will ultimately depend on their most preferred investment strategy or other personal preferences. If the investor prefers something risky and highly profitable, they will prefer to invest in multi-family properties.
Conversely, if they prefer a stable and safer approach that works long-term, investing in single-family homes will be the right call. In some cases, the budget and the investor's availability to oversee the investment may influence their choice. Either way, our discussion so far has shown that both multi-family and single-family homes offer decent ROIs in rental income.
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