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Is it Better to Invest in Single Family or Multi-Family Rentals?
Single family or multi-family?
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“What do you know about Single Grain?,” asked the CEO of the Los Angeles based digital marketing agency. My response was lackluster for such a basic question. It was my first job interview out of college, and I was unprepared. The next day he came out with a podcast episode titled “How to Hire Full-Time SEOs That Don’t Suck.” I was not hired.
Like job interviews, real estate investing requires a game plan. Preparation. It’s important to know what you are looking to buy. Broad criteria makes it hard to find investment property.
Residential real estate has two main property types: single family and multi-family homes. Forget condos. HOAs are trash.
Single Family Rentals:
The most common property type is a single-family residence. SFR for short. An SFR is a one-unit home. Typically, they are detached. The owner owns the land the house is on.
SFRs have a lot of benefits. They are easier to buy and finance. SFRs only require 20% down as opposed to 25% with multi family. Tenants typically feel like it is “theirs” and as a result, take better care of the property. At least that’s what I’ve seen people say, and it seems right according to my anecdotal evidence. Tenant turnover is usually lower. SFRs are easier to sell. The pool of buyers is bigger. Investors and non-investors buy SFRs. Buyers for multi-family property tend to be investors. There are some downsides. SFRs are generally more expensive per unit than multi family. Thus, harder to scale. They cash flow less, since they only have one unit. If a tenant moves out, you get $0 rental income that month.
Multi-Family (2-4 unit) Rentals:
Multi-family properties are houses with 2-4 units. Anything 5+ units is a commercial property. As the name suggests, multiple families can live in these properties, depending on the number of units.
Multi-families typically cash flow more than SFRs. They are easier to scale for a few reasons. Multi-families are cheaper per unit. You can control more units with one loan. Most traditional lenders only allow you to finance 10 investment properties. At minimum, 10 multi-family mortgages would be twice as many units as 10 SFRs. The vacancy risk is spread out. At some point a tenant will move out. If one tenant vacates, you still have the other tenant paying rent and covering the mortgage. With multiple units you can take advantage of house hacking. If you live in one of the units, you only need to put 3.5% down on the property. On the flip side, multi-family is more expensive if you don’t live in one of the units. Multi-family rentals require 25% down. Multi-family properties have higher purchase prices than SFRs. They are known to have more tenant headaches, and higher tenant turnover. Often, duplexes are not someone’s forever home. More tenants moving in and out means more frequent repairs. Multi-family are harder to sell. Non-investors don’t usually look to buy multi-family homes.
Why I Prefer Multi-Family:
Cash flow is king, and I’m looking to scale as fast as possible. It’s convenient to get mortgages through the lender I work for. I want to maximize the number of units I control since I can only get 10 mortgages through them. We are out here for empires.
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