Investing in real estate can open up many opportunities to reach your financial goals. Whether you’re hoping for an early retirement or want to build your wealth, investing in rental properties can help you access passive income. If you’re new to real estate investments, you might consider whether to pursue single-family or multifamily properties.
Some investors may want to start with single-family homes and eventually move into multifamily homes or buildings. Others prefer to invest in multifamily properties to create a more diversified portfolio. However, both types present unique benefits and challenges. Understanding what type of rental property aligns with your investment goals can put you on the path to financial freedom.
What Is a Single Family Investment Property?
A single-family rental property is a residential, detached home with its own lot, including modular homes, manufactured homes, and other one-family houses.
These standalone properties typically rent to a single tenant, such as one family with children or one couple. Investing in a single-family home means your tenants pay you to use what you own instead of you paying to own it.
Often, investors will purchase a single-family home and renovate it to attract new tenants. Single-family rental homes can be relatively simple to buy and hold. They usually generate passive rental income and long-term appreciation for investors. The most significant difference between single-family and multifamily investing is the price. Single-family homes require less capital upfront than multifamily properties and other investment real estate properties. For this reason, they’re typically more suited to new investors.
What Is a Multifamily Investment Property?
Multifamily properties are residential buildings with multiple individual units, including:
- Multistory apartment buildings
- High-rise apartment buildings
Unlike a single-family rental property, multifamily properties rent to more than one tenant. Any residential property with several units may be considered a multifamily investment property. In some cases, investors may even choose to live in one of the units, making them owner-occupied properties. To be considered multifamily, properties must have two or more separate dwelling units. Additionally, properties with five or more units are considered commercial property.
Investors of multifamily properties generate monthly income from their multiple tenants, which is why returns are often higher than with a single-family home. Some investors prefer multifamily properties due to a more predictable cash flow and lower risk for vacancy. Likewise, some tenants may find multifamily properties more attractive if there are amenities like fitness centers and pools.
Benefits and Risks of Single Family vs. Multifamily Investing
Both single and multifamily properties can be profitable, but they operate very differently. Like any real estate investment, they each have potential benefits and drawbacks.
Investors who invest in single-family rental properties often have more control over their investments because managing and maintaining smaller properties with fewer tenants can be easier. For instance, a single-family home may take less time and require less day-to-day responsibility than a multifamily property. A common reason that investors might choose single-family investing is because of the lower price point compared to larger properties.
Buying a single-family home to rent to a tenant allows you to increase your wealth and grow the asset’s value without paying the amount a multifamily property would require. This can be an attractive starting point for individuals who want to become real estate investors. However, investors can also purchase multiple single-family homes to diversify their portfolio and build equity over time.
Single-family homes appeal to many types of tenants, including young families or professionals, as it’s a more private space than a multifamily unit.
However, the tenant pool for single-family homes may not be as high as for multifamily properties, depending on the location. Another risk of investing in single-family properties is that investors do not receive as much monthly cash flow. Additionally, if your tenant moves out, you receive no income. In a multifamily property, you would still have income even if one or two units were vacant.
Because multifamily properties are more likely to offer various amenities, they may attract a diversified tenant mix. Investing in multiple units may also provide insulation from market conditions and tenant risks. For example, if you own four rentable units and one of your tenants stops paying rent, you would still have a monthly income from your other tenants.
With a single-family property, the cash flow is generally not as predictable. During an economic downturn, multifamily properties may hold steadier as these types of residences tend to have lower rents per unit than single-family homes. Of course, this is not always the case.
Additionally, because you own and rent out multiple units, your monthly income could be greater. Higher returns may allow you to achieve financial freedom or reinvest your funds into other real estate properties if you wish.
A disadvantage of multifamily properties is that they are typically much more expensive to buy than single-family homes. This means you would need more capital upfront for a larger down payment. Likewise, the more units you own, the more work you may have to do to maintain and manage the properties.
Repairs and upgrades to multiple units take more time and effort than for a single residence. Managing more than one tenant can also be challenging. While hiring a property manager is an option, it also comes with an added expense.
Factors to Consider Before Investing in Single or Multifamily Properties
If a single or multifamily property piques your interest, it’s important to understand key factors before investing. You’ll want to keep the following tips in mind:
- Relevant laws: As with any property, investors must be aware of any specific local regulations, income taxes, additional taxes, license requirements, zoning, and landlord-tenant laws.
- Costs: Many costs are associated with a rental property, including repairs, renovations, taxes, and fees. If your property has more than five units, you may also have to make a larger down payment, depending on your lender.
- Location: A property’s location can determine how easy it is to attract tenants. Proximity to local businesses, amenities, and future developments can improve its desirability, for example. The location also affects how much you can charge for rent.
- Income: Consider the amount of rental income you could realistically earn for the property. Calculate what you’ll need for the mortgage, monthly expenses, and potential repairs. This can help you determine if the property is worth your investment.
- Seller: If possible, get to know the person selling the property. Determine if they have a good reputation and history of taking care of the property, such as making periodic renovations and repairs.
- Operating company: If you cannot commit the time and effort of overseeing your rental property, you can hire a property manager or team to maintain the property and manage tenants. Though this adds a monthly fee, it can significantly reduce your burden and help your property stay in good condition.
- Investment options: As investments, single or multifamily properties may qualify for a tax-deferred exchange known as a 1031 exchange. This enables investors to sell one investment property and purchase a like-kind property while deferring capital gains taxes on the sale if the proceeds are reinvested within 180 days. Learn more about 1031 exchanges and their requirements.
Unlock More Investment Opportunities With 1031 Crowdfunding
All real estate investments carry some degree of risk, but multifamily properties can also offer significant benefits. Finding the property that suits your investment needs and goals is essential to a profitable endeavor. At 1031 Crowdfunding, we make it easy for our clients to view our extensive selection of vetted real estate properties on our platform, including multifamily and 1031 exchange properties.
Our professional, knowledgeable team will guide you while you perform your due diligence before deciding. At 1031 Crowdfunding, it’s our goal to make real estate investment easier and help our clients learn about alternative strategies that align with their needs. To learn more about how we help our clients invest in multifamily properties, register for an investor account today.
This material does not constitute an offer to sell or a solicitation of an offer to buy any security. An offer can only be made by a prospectus that contains more complete information on risks, management fees and other expenses. This literature must be accompanied by, and read in conjunction with, a prospectus or private placement memorandum to fully understand the implications and risks of the offering of securities to which it relates. As with all investing, investing in private placements is speculative in nature and involves a degree of risk, including loss of your principal. Past performance is not necessarily indicative of future results and forward-looking statements and projections are not guaranteed to achieve the results described and your actual returns may vary significantly. Investments in private placements are illiquid in nature and there may be no secondary market or ability to sell the investment should the need for liquidity arise. This material should not be construed as tax advice and you should consult with your tax advisor as individual tax situations will vary. Securities offered through Capulent, LLC Member FINRA, SIPC.