October 7, 2019
There are many different options when investing in real estate. Many first-time investors have a difficult time choosing between a single-family property or a multifamily unit. The answer depends somewhat on your investment goals.
A single-family home is defined as a structure maintained and used as a single dwelling unit that is not attached to any other structure and does not share common walls or a roof with other structures. A single-family unit also does not share property as the area or yard around the building belongs to the owner. It also has its own private entrance from the outside, as opposed to an apartment building that has hallways that lead to outside doors.
Multifamily residential buildings are also called multi-dwelling units, or MDU’s. Multifamily homes allow more than one family to live in the same building, with separate accommodations. Units can be side by side or stacked on top of one another. Duplexes, condominiums, and two-story apartments are examples of these types of structures. Multifamily properties can come in a variety of sizes. They can be small, with 2-4 units, or large, with many units within the same building.
Mixed-use buildings, with space for commercial or office use, as well as residential use, also fall into this category. High-rise apartments, while technically house multiple families, are usually not included in this category. Your portfolio grows quickly as more units are in a single building.
Multifamily properties are often easier to manage because tenants share the same roof and property. If you purchase a property with four units, you own need to mow one lawn or replace the siding on one building. In comparison to owning four separate single-family properties, this is a lot less maintenance.
As an investor, you’ll want to understand the financial benefits of each type of investment. The process of obtaining a loan for a single-family dwelling has more options and is easier to obtain. Multifamily properties require a commercial loan so there are fewer banks that will offer loans for this type of purchase. In some cases, they can be more difficult to obtain, however, once there is a history of purchase some banks are more willing to provide the finances. If you are buying a multifamily home that qualifies for a residential loan, you can apply for an FHA loan which usually only requires a down payment of 3.5%, provided you plan to live in one of the housing units.
These two types of investments have different values. The value of a single-family home is based on comparable sales in the area. The value of a multifamily dwelling is determined by the income it produces. The market plays a role in the expected rate of return on the property, and that rate calculates the value of the property.
The cap rate (capitalization rate) is often used to find out the value of a multifamily property. It is the amount received in net income as a percentage of the property’s purchase price. So, if you paid $500,000 for a multifamily property, and it made $50,000 in net profit, the cap rate is 10%.
Both types of properties will appreciate. A single-family home benefits from repairs or updates but it is only on one housing unit. When you make a repair or update (value-add) to a multifamily building, real estate appreciation is forced collectively on all of the units. Forcing appreciation on a single unit is more costly than on a multifamily unit.
For those investors that recognize the value of investing in real estate, but do not want some of the responsibilities attached to it, a real estate investment trust (REIT) might be a good option. REITs buy properties using money from many investors, and the investors, in turn, benefit from being part-owner in the real estate properties (without the hassle of being a landlord).
This is an easy way for investors to turn a profit from real estate. And, it requires a much lower initial investment as compared to buying real estate outright. DiversyFund offers an investment platform for a professionally managed portfolio of real estate assets. This gives investors access to the benefits of investing multifamily real estate with 90% of profits paid as dividends.
There are many considerations when investing in a single-family or multifamily property. The best investment depends on your time and budget. The potential for a larger amount of cash flow and diversified portfolio falls with a multifamily investment. A REIT is an option for those who want to reap the benefits of a multifamily investment without some of the headaches.