A single family or a fourplex? Two singles or a ten unit? If you go to real estate investing websites such as BiggerPockets.com and read the forums you’ll see that there are many different strategies people use to achieve the holy grail of financial freedom through passive income. As Appliances Connection has many landlord clients we thought we’d examine what is working for people and why. Seasoned landlords often fall into two camps: investing in single family vs multi unit properties. Here are the pros and cons of each.
Single Family Homes
Easier To Buy Inexpensively
It’s often easier to buy a single family than a multi. There are many available and if you’re looking a steal, there are foreclosures, sheriff’s sales, and real estate owned properties (aka REOs, which are properties seized by banks or other lenders for non-payment) available. These often consist largely of single-family houses being sold for pennies on the dollar.
Tenants Prefer To Live In Single-Family Homes
It’s also worth noting that tenants generally prefer to live in a one unit home than an apartment building with other tenants. Who wants to deal with noisy neighbors? There is more pride in single-family home tenancy.
Another big plus is that renters tend to stay longer in a single unit rather than a multi. This results in long-term term stable cash flow with fewer repairs.
Banks Are Willing To Negotiate To Sell Many At Once
For investors with deep pockets, it’s possible to buy many single-family homes at once, thus creating a large instant cash flow. At the time of the last financial crash, there were swathes of abandoned and foreclosed homes in Las Vegas, Florida and elsewhere. Known as a “tape”, investors negotiated with banks to buy hundreds of these at a fraction of their market value. They were then able to rent them out (because, after all, people always need somewhere to live, even if they can’t qualify for a mortgage). When the market picked up they could be sold at a profit.
One Single Family House Won’t Produce Much Cash Flow
The best single-family homes generally don’t produce a huge cash flow. The ones in great neighborhoods aren’t rentals. People own them. In order to get a decent cash flowing property, you’ll probably need to be in a “C” level neighborhood and will be charging under a $1000/month in rent (depending, of course, on the neighborhood).
Single Family Homes In Good Neighborhoods Are Expensive
There are cases where a larger, expensive single-family homes get rented for thousands of dollars. This often happens when an executive moves job and needs a place to live quickly. But chasing down these homes is a risky business. Who wants to buy a house for $500K in the hope that they find a tenant to pay top dollar in rent?
Roofs and Heating Systems
One of the biggest disadvantages of owning a single-family rental property is that there is one roof and one heating system per home. In a multi-unit property if the roof is leaking, once it’s fixed, all 10 or 20 tenants will be ok. In a single unit, only one tenant will stay dry. If you have 5-10 other single units, you still have to worry about each of their roofs, heating systems, basements etc.
Vacancy Hurts More
When your single unit house is empty or your tenant stops paying the rent, you will have to dig into your pockets to cover all expenses. It will produce no other income. In a multi-unit, one vacancy won’t sink the ship.
More Travel Time For The Landlord Or Property Manager
If you have a few single-family houses in different parts of town, the travel time between them will not only take up your day but eat up your gas.
For the sake of this article, we will assume the multi-unit property has 4-10 apartments and the investor is considering the same number of single-family units.
Economy of Scale
The main reason for buying a multi-family property is the main negative for a single family unit. A multi can still operate, albeit with difficulty, if there are a few vacancies. The more units, the easier it is to cover costs.
One Set of Bills
As stated earlier, one roof covers the whole building. If the landlord is covering heat, one system warms the whole building. Thus, you will only be paying a plumber once. Additionally, one insurance policy will cover the entire building.
Financing Kills Many Birds With One Stone
If you are buying a 10- unit building, one loan can obviously buy you 10 apartments. To buy 10 single family properties you will most likely need 10 different loans. Banks might not be too favorable to seeing that many mortgages crop up on your credit report and so financing more properties could be difficult.
Easier To Build Equity
The value of a commercial property is based on how much rent it generates as opposed to simply what the comparable sales are. So, if you can take a poorly performing building, do some repairs and rent it for top dollar, you will instantly gain equity. You can either sell or pull out cash to fund another purchase.
No Travel Time
All your units are under one roof. You or your property manager can handle all their business in one location.
If you buy correctly and have your place fully rented, the cash flow should easily outperform the equivalent number of single-family properties.
The Wrong Location Could Spell Disaster
With any rental property, location is important. This is even more of a factor with a multi-unit. If you buy in a war zone, looking only at a projected Capitalization (CAP) Rate, you will be in for a rude awakening. Unpaid rent, constant visits to landlord/tenant court, damages to the property, people living in the building who aren’t on the lease, and illegal activities are just some of the woes many landlords experience when they buy a multi-unit property in the wrong part of town.
Problems Cannot Be Isolated
The inverse argument of why it makes sense to buy a multi-unit could also be seen as a negative when it comes to roofs and boilers. When a roof is damaged, or the heat is down, everyone in the building is affected. With a single house, you are mitigating the losses in your investment portfolio to just one property.
Issues Between Tenants Can Escalate
Even in a decent part of town, it’s not uncommon for tenants to have issues with one another. A dog with unclipped toenails on an upper wood floor, a baby’s crying, food smells, loud music, parking in the wrong space, tenants becoming romantically involved can all result in headaches and an increased tenant turnover.
Fire and Water Damage Is More Likely
More tenants mean more cooking appliances and electronics. That can result in a greater chance of fire incidents. Ditto goes for water damage from multiple baths, showers, and kitchen plumbing. This also may bring you legal headaches if you happen to have multiple particularly litigious tenants.
Both multi units and single family properties have their merits as investment vehicles and have proven to be extremely profitable. However, certain principles apply.
If you buy a multi-unit property in the wrong neighborhood you could lose your shirt. Forget the CAP rate. It always looks good on paper but the human element is not something that fits easily into an Excel spreadsheet. Neither does peace of mind. In a decent neighborhood, the CAP Rate may be lower but tenants with steady jobs pay rent on time and ultimately these properties are great to hold on to for the long term.
With single unit properties, you can be a little more forgiving. Again, any property in a distressed area is a risk but certain C-, C or C+ neighborhoods could work well for accruing single units. In some cities (e.g. Pittsburgh, PA; Cleveland, OH; Ann Arbor, MI) you can buy a good single family house for $50,000 or less. Rented out at $850.month could net a $400-500 monthly cash flow. Buy a few of these and they could serve as a second income. You won’t get rich with them, but as long as they are maintained they could keep chugging away giving you tax benefits and bringing in a few hundred extra bucks each month.