When you are beginning as a real estate investor, it can be difficult to determine which investment strategy is best for you. Understanding the pros and cons of investing in single family homes vs. multifamily is critical.
Single Family Investing Pros & Cons
Investing in single family homes has many benefits, it is easier to start out with single family homes because there is more abundant inventory than with multifamily properties. The cost of purchasing a single family home is significantly lower than multifamily properties, so less capital is needed up front. Another advantage is that it is easier to sell a single family home if it is not performing as you had hoped. Lastly, single family homes attract more long term tenants that are typically more financially stable.
The disadvantages of single family home investing includes the risk of vacancy. Missing one or two months of rent payments if you own only a few properties can be detrimental to your cash flow. Cash flow is much lower in single family homes in general than a multifamily property, multifamily properties have multiple units rented out, generating stronger and more stable cash flow that can sustain a few vacancies. Building a portfolio with single family homes requires a lot more effort. You will most likely have to find the property, negotiate the price, finance multiple properties and handle the marketing and tenants on your own. Purchasing just one multifamily property could increase your cash flow exponentially versus multiple single family homes with less work up front.
Multifamily Investing Pros & Cons
Investing in multifamily properties increases your portfolio significantly faster and can be more profitable and efficient than hunting for multiple single family properties and managing them. The other major advantage of multifamily properties is forced appreciation, you as the investor control the value of an investment property due to your actions to increase the net operating income (NOI). There are many strategies and opportunities to increase the NOI with a multifamily property. In contrast, a single family property can only be renovated to increase value, but the value is completely dependent on the market and comps.
Investing in multifamily properties does have it’s cons, it requires a high minimum investment and can be difficult to come up with the down payment on your own. In this case, a multifamily real estate syndication enables you to partner with other investors to purchase a larger multifamily property. The multifamily industry is also highly competitive and can be difficult for an investor just starting out to break into and secure properties. Managing a multifamily property can also be labor intensive, even with a third party company managing it. Property management companies have to be monitored to ensure that they are running the property to your standards and at full optimization, renovations have to be overseen and tracked and much more unless you are a passive investor. Becoming a passive investor in a multifamily syndication allows you to take a hands off advantage of lucrative opportunities and is a great strategy if you are not ready to do it all on your own. If you want to learn more about the benefits of passive investing, schedule a call today!