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Should You Invest in a Single or Multifamily Rental Property

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If you’re considering investing in rental properties, you have a lot of decisions to make. Which neighborhood would make the most sense for your investment? How much can you spend, and how much can you charge in rent to make a reasonable profit? What do you need to know about landlord/tenant laws and tenant screening, so you don’t find yourself in hot water after you’ve started marketing your property?

Before you can address any of these questions, you should explore one of the fundamental inquiries of new investment property prospects: should you invest in a single-family home or a multi-family rental? Maybe you already have something in mind, or perhaps you don’t even know where to begin. In this post, we’ll explore the challenges and benefits each option brings to the table.

Single-Family Homes: Pros

Single-family homes tend to be more affordable than multi-family homes. Mortgage lenders are more likely to give you a chance if you’re opting for this type of property, particularly if you’re just starting in the investment world and don’t have a ton of expendable capital to back up your loan application.

Property management of single-family homes is much easier than multi-unit homes because you don’t have to tend to several different tenants.

Single-Family Homes: Cons

You’ll be on the hook for your mortgage payment without any income coming in if your home goes vacant. This can be stressful, but with the right marketing and upkeep on the home, you hopefully won’t have to deal with an empty property for too long.

If you’re purchasing a single home, you’ll only need to worry about maintenance on one property. But what if you’re weighing the option of three single-family homes versus a multi-family property that houses three units? In this case, the cost of maintenance could be substantially higher on the single-family homes because you might have to replace roofs, HVAC systems, and plumbing, which would otherwise all be taken care of at once under the single multi-family property.

Multi-Family Homes: Pros

One of the main draws of multi-family rental investments is the fact that you’ll likely have tenants in at least some of the units at all times. This means if one tenant moves out, you’ll still have renters who can help cover the cost of your mortgage while you’re looking for new renters to fill the vacant space. You’re less likely to face $0 income months when you have several different renters occupying your property than if you have a single-family home.

If you opt to live in one of the units of a multi-family property, you should be able to apply for FHA financing. Usually, this requires a 3.5% down payment (as opposed to a standard 25% for investors who won’t be living in the building).

Multi-Family Homes: Cons

Multi-family homes tend to be much pricier than single-family homes, and it can be more challenging to get a mortgage for this type of property. The underwriting process for the loan can be quite cumbersome, and mortgage companies may require a track record of successful rental investment activity from the past. If you’re new to the game, you may not qualify for a multi-family loan, even if you have exceptional credit.

With multiple tenants, you’ll have more maintenance calls and issues to deal with than you would if you had a single-family house. Of course, professional property managers can help keep the stress of this type of situation at bay with 24-hour answering services, maintenance pros, and a team of vendors who can tend to any issue that may arise.

Being a first-time property investor isn’t easy. There’s a lot to learn and a whole lot of research you need to dig into before you commit to a property. Remember, you’re not the first one to do this, and if it seems overwhelming, think about all the other people who are already successful landlords. The first investment is the hardest because it’s new territory. Once you figure out the fundamental steps, everything will get easier.

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