For some of you just starting out, it is hard to decide which type of property is best to start investing in. Many of you are probably just like me when I first started out in real estate. Attending meetings with recent graduates of the “how to get rich” weekend seminars. Working with real estate agents that are not investor savvy. Endlessly driving by and walking to properties that might offer the best deal.
Most of the investors who attended the meetings were newbies who were purchasing single family homes and renting them out. I wondered whether this was a better strategy than buying multi-unit buildings. I sat down one day and weighed the two options against each other. The chart below shows how analytical I can get regarding which direction to follow and should be able to help you make sound investment decisions:
Investing In Single Family Homes vs. Multi-Unit Properties
- There are more of them than multi-units therefore there are many more motivated sellers.
- Financing is easier to obtain.
- If need be, you can live in it.
- Value increases based on market conditions, not on the building's income and expenses.
- Sellers are less sophisticated.
- It's easier to get creative financing such as lease with option to purchase.
- There are many more unsophisticated buyers.
- You can fix it up cheaply and raise the value.
- It's easier to manage.
- It may be subject to fewer government building inspections and regulations.
- You don't have to mediate tenant disputes.
- Tenants stay longer, because they tend to be families who take pride in their home.
- You can often get in with a lower down payment.
- It's easier to geographically diversify your economic risk (better to own six houses with one in a deteriorating neighborhood versus owning a six-unit in a deteriorating neighborhood).
- If you sell, there are a lot more agents who sell houses versus multi-units.
- If you sell, there are many more buyers of houses than multi-units.
- There are many government-funded programs to help home buyers, such as low interest and forgivable loans.
- Property insurance is more available for houses than for multi-units.
- Utility costs can more easily be passed on to the tenant in a house.
- It's either 100% occupied or 0% occupied. A vacancy is brutal on the cash flow.
- Multi-units usually offer a better chance for a positive cash flow. Many houses are negative cash flows.
- Multi-units are more cost efficient – a new roof on a four-unit doesn't cost four times a roof on a house.
- One bad tenant in a house can really hurt.
- Houses rent to families (plus pets). This can increase maintenance expenses.
- Houses are more likely to have children, which increases the liability risk.
- An empty house is more likely to be vandalized than an empty apartment in a multi-unit.
- Houses cost more per unit.
- Cosmetic improvements and better management can have a greater impact on the value and cash flow of a multi-unit versus a house.
- FNMA lending limit on houses.
After mulling over the pros and cons for several hours, I decided to look into multi-unit properties. I felt they offered me a better chance for a positive cash flow.
I hope that this comparison chart is a great aid for helping you get started in real estate investing.