Many real estate investors often ask themselves which investment vehicle is better. They both have many advantages and disadvantages. Ultimately it will come down to your investment philosophy.
Single Family Homes - Pros
- Generally SFH appreciate faster than MFH.
- Traditional financing rates are more competitive.
- There is a larger pool of buyers/sellers of you can sell/buy quickly.
- No common areas or walls are shared which minimizes tenant conflicts.
- Ease of purchase equity given the amount of foreclosures on market.
- Better quality tenants.
- Single utility meters so tenants pay for all utilities.
Single Family Homes - Cons
- Generally cash on cash return is not as high as MFH.
- Property management rates tend to be higher due to economies of scale.
- If you lose a tenant you do not have other units bringing in rent.
- Traditional financing limits you to 10 loans and 25% down.
Multi-Family Homes - Pros
- Typically higher cash on cash returns as price per door tends to be lower.
- Property management fees are lower as all units are consolidated.
- Generally rents are less, which expands your renter pool.
- Loss of tenant has minimal impact as other units are producing rent.
- Financing is tied to the property financial performance rather than buyer's financials.
- You can force equity as the property value is determined by the net operating income (NOI) and capitalization rate (Cap Rate)
Multi-Family - Cons
- More tenant issues as walls and common areas are shared.
- Additional maintenance costs for common areas and pools.
- Appreciation is tied more to rents than the market.
- Generally appreciate slower than SFH.
- Tenant placement tends to cost more.
- Additional management and cost for units that do not have separate utility meters.
- Tenants generally do not stay as long as SFH so you will have more turnover and make-ready costs.
- Commercial financing rates are higher and can be more of a challenge to obtain.
As you can see both SFH and MFH have their advantages and disadvantages.
If your goal is low barrier to entry, easy of exit strategy, higher appreciation and better financing you may want to consider SFH. If you are looking for higher cash on cash returns and economies of scale you may want to look at MFH.
Generally most new investors start with SFH due to the ease of financing and abundance of deals on the market. A lot of our clients also are keeping their home as a rental after they move and plan on selling when the market recovers.
Once investors buy 10 properties under traditional Fannie Mae loan limit they jump into MFH. Commercial financing uses an income approach, which does not limit you to a number of loans.
We personally started with MFH, which created great cash on cash returns. Now we are picking up SFH foreclosures with the cash flow from the MFH investments. This has allowed us to create great purchase equity and the returns are right up there with MFH.
No matter which option you take you cannot go wrong. Real estate is a great vehicle to build wealth and passive income. With real estate you have 5 different areas building you wealth.
- Equity capture on purchase (abundance of foreclosures!)
- Cash on cash returns
- Principle pay down (tenants do the work for you!)
- Tax advantages (Deprecation, write-off's, 1031 exchange)
Try that with your stock portfolio! Happy investing!
If you have any questions or would like help finding investment properties please contact our office.