Which is better to invest in? Single family homes or multi-unit rental properties?
With the stock market rising and falling like the Rockies, my wife and I are beginning to look for another option to place some more of our hard-earned money. Since a year ago, we have been saving heavily, combining our equity (we got married back in July), and looking for that next investment opportunity.
We saved up tens of thousands of dollars and were ready to find a place, buy it, and rent it out….and then we realized how hot the market was. After a few weeks of searching, we have not yet found the right property for us, and we’re thinking of expanding our search, both for proximity and the property type.
At first, we were set to buy a single family property. Ideally, it would have a solid foundation and roof, but the inside would have dirty carpet and ugly paint – deterring many buyers, but a relatively easy fix for us. Unfortunately, this type of house has not yet presented itself, so we’re left wondering, “Should we invest in single family homes or multiplexes?” Are they both a valid option for first-time landlords like us?
The Single Family Home As An Investment
I am incredibly risk averse. I was so uncomfortable with my own home loan that I decided to pay it off completely after the 3rd year of payments. After just one more year, I had it gone and I was thrilled. No longer could the bank take my house and turn my life upside down if I missed a few payments.
I had the same thought about investment real estate, not necessarily about the debt (although, we do want to invest with cash), but about the type of renters we’ll get with our investment. If we buy up a single family home, we envision a mom, dad, and two children occupying the 3 bedroom, 2 bath property. With their life’s experiences, we foresee this mom and dad making timely payments and doing their best to keep up the property. In other words – a more risk averse investment.
Is this a pipe dream? Possibly, but let’s go through all the potential pros and cons of renting out a single family home vs. a multiplex to see what makes logical sense.
Pros of the Single Family Home
- Attract more quality renters – Tenants that have the money would rather live in a stand-alone property to avoid the potential of noise coming through the wall next to them. These are likely families (instead of single individuals), which may breed more responsibility.
- Long-term renters – People that rent homes are typically looking to stay for a while. Those that rent units above a garage just want cheap rent so they can save up money and leave as soon as possible.
- Easy Plan B – If landlording becomes a nightmare, then we could probably sell a single family home in a couple of weeks (given the hot market). The option of selling really takes the pressure off of the purchase.
Cons of the Single Family Home
- Difficult to Find – Everyone and their brother is looking for a single family home right now – long-term investors, house flippers, and those that are looking for their primary residence. The market is flooded with buyers, making it almost impossible to find a deal, and even more difficult to win the bid on it! If we continue to focus our efforts here, we may never buy an investment property!
- High vacancy rates – If the house rents out, then we have a 0% vacancy – if not, then we have a 100% vacancy. Investing in a house means that we’re either rolling in the dough or getting absolutely nothing. This is a fairly risky way to go.
- Depend on tenant for upkeep – Single family homes are typically bigger inside and have outdoor upkeep as well. Unless you find a perfect tenant that keeps it all looking nice, this could become a nightmare to manage down the road.
In some ways, the single family home is a safer option, but in others it can be quite risky.
The Multiplex Property As An Investment
A multiplex is simply a structure that has more than one unit within the surrounding walls. A single family home can actually be transformed into two or more units, which would then turn it into a multiplex.
Since Liz and I have been striking out in finding a single family home to invest in, I began wondering what it would be like to purchase and rent out a multi-unit structure. Might it be a better option? Let’s check out the pros and cons:
Pros of the Multiplex
- Cheaper per unit – A cheap single family home in our area is about $100,000. A fairly inexpensive duplex nearby is $115,000, meaning the price per unit is only $57,500, which is far cheaper than buying a single family home to rent out.
- Less demand for purchase – There are far fewer people looking to invest their money in a multiplex than the single family home (pretty much only the long-term investors are interested in buying), meaning that we can more easily find a deal on the property.
- Lower risk of vacancy – With a multiplex, the odds of having 100% vacancy (and therefore zero money in your pocket) is more slim. With more rentable units, you’ll have a more consistent cash flow coming in, even if one of your renters decides to up and leave in the near future.
Cons of the Multiplex
- Hard to sell – While you can decrease your frustrations by buying a multiplex since it’s in lower demand, it also makes the Plan B incredibly difficult. In other words, since there aren’t that many people looking to buy a multiplex, it could be tough to sell it down the road. This might not be a big deal if you’re in it for the long haul and have decades worth of cash flow out of it, but if you quickly get sick of being a landlord and want out of the real estate game, then you’ll likely lose quite a lot of money trying to sell the property quickly.
- Less rent per unit – Each unit is cheaper for you to buy, but you’ll likely get less money in rent when compared to a single family home as well (the question is really how much you’ll get in rent overall when compared to the overall purchase price, both for the single family home and the multiplex).
- More cost up front – If in the same neighborhood, the multiplex will require a greater up-front investment than the single family home. In our recent search, the duplex was $15,000 more expensive than the comparable single family home in the same area.
- May attract a less quality renter – This may not be accurate all the time, but when you have a smaller place with more renters in one structure, they tend to reduce in quality as well. They might be dirtier, have more complaints, and they might even stiff you on a few monthly payments.
All in all, both options can be fantastic long-term investments and earn you the kind of cash flow you desire. If you are certain that you’re in it for the long haul, then the multiplex might actually be the best option for you.
If you’re nervous about becoming a landlord and a great single family property deal falls into your lap, then it probably wouldn’t hurt to try it for a year or so to test the waters. In the end, Liz and I will be looking for a quality building to purchase, rent out, and then use that cash flow to buy the next one.
Whether it’s a multiplex or single family structure, I don’t think it much matters at this point. We want to be landlords into our old age, using the income for our care-free retirement.
What about you? Would you rather invest in single family homes or multiplexes?