As a new landlord, you have a wealth of choices about how to build your investment portfolio, including what kind of property type you’d like to manage to secure rental income streams. But the process can be overwhelming if you don’t know where to start!
That’s why we’ve prepared this guide. We’ll discuss the different property types landlords should know while providing the pros and cons of managing each type. Let’s get started!
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What's the Difference Between a Single-Family Home vs Multifamily Home?
According to Tech24Construction, “a single-family home is a freestanding structure that shares no common walls with another residence. Multifamily homes contain separate residential units within a single structure.” For example, a freestanding ranch-style house is a single-family home while an apartment complex is a multifamily home. These property types are also differentiated by their number of units. Single-family homes have one unit while multifamily homes contain four or fewer units. (If a property contains five or more units, it’s considered to be commercial real estate.)
Single-family homes are more common investment properties among first-time landlords because they’re easier to manage, but multifamily properties can offer a higher return on investment. To help you better understand single-family vs multifamily homes, we’ll break them down further.
What Is a Single-Family Home?
As the name suggests, single-family homes are houses designed for one family, with no more than four units total (including basement apartments).
The national median cost to purchase a single-family home was $374,900 in Q2 of 2021, but the national average home price is projected to reach $382,000 by 2030. What may interest you more is the fact that the average monthly rent for a single-family home was $2,018 as of April 2022, and there are over 70 million single-family homes in the U.S. So it’s not a small market!
Pros of Managing a Single-Family Home
According to America’s Housing Alliance, landlords who manage single-family properties enjoy:
- Long-term tenants: A single-family home is often a long-term investment, with tenants staying for years at a time — meaning you don’t have to be constantly on the lookout for new tenants.
- Low management costs: Because single-family occupancy tends to be consistent, you can expect long-term tenants to take better care of the property, which means saving on repairs and maintenance costs.
- Consistent resale value: Single-family housing is more common than multifamily units, so they tend to hold their value better over time. When it comes time to sell or refinance your investment, you’ll get more bang for your buck!
Cons of Managing a Single-Family Home
On the other hand, purchasing and managing single-family properties means:
- High upfront fees: Buying a single-family home is no small feat — there are many fees associated with the purchase and sale, like fees for real estate market agents, attorneys, title companies, etc., that can add up quickly.
- ROI decreases with vacancies: While many single-family tenants want to stay on the lease as long as possible, some will inevitably need to change their living situation. When that happens, you’ll need to find a new renter or otherwise risk setting back your investment strategy.
- HOA fees: Depending on the neighborhood, you may have to pay homeowner association fees on top of your property tax, insurance, and other charges.
What Is a Multifamily Home?
A multifamily home is any property with more than one housing unit but fewer than five units, like duplexes or triplexes.
The number of people living in these dwelling units is usually higher than you’d find in a single-family home, meaning there’ll likely be more people sharing common areas (like gardens, lawns, laundry areas, etc.). This shared space generally makes multifamily units feel more like a community.
Now let’s talk numbers. While the cost to buy multifamily properties varies wildly, there is a solid demand for this type of real estate, particularly as rents have lately been rising across the U.S. As of April 2022, multifamily monthly rent rose to an all-time record of $1,659, which is a 14.3% increase year over year.
According to Yardi Matrix’s Multifamily Report, “multifamily demand and rent growth remain incredibly strong throughout the country. Of [their] top 30 metros, rent growth was up at least 8.8 percent over the last year in all but one.”
Pros of Managing a Multifamily Home
If you’re thinking about buying a multifamily home, you may enjoy:
- Lower risk: Buying a multifamily home has its risks (just like any other investment), but those risks are much lower than they would be if you were buying other types of property since it’s unlikely that you’d face a total vacancy, given that multiple tenants will be occupying your units.
- Easier to finance: The bank will be more likely to lend you the money for a multifamily property because it’s a lower-risk investment.
- Long-term value: As Green Residential explains, “multifamily properties are priced almost exclusively based on how much income-generating potential they have. They’re bought and sold primarily as forms of investment, and therefore have more stable long-term growth (in many cases).”
Cons of Managing a Multifamily Home
Green Residential also points out that there’s more to consider before you invest in a multifamily rental property, including:
- Increased property management time: Multifamily rental homes require more of your (or your property manager’s) time than single-family homes because you’ll have more tenants to manage and more units to maintain.
- New issues to conquer: when residents live in multifamily housing, they’re more likely to impact each other. For example, if you have a noisy resident, it’s highly likely that he’ll be annoying your other residents, which can mean that you need to get creative and comfortable having difficult conversations regarding tenant behavior.
- Stricter regulations: Multifamily homes have stricter regulations than single-family homes, which can be attributed to the number of people impacted by each property. Be sure to brush up on your local landlord-tenant, state, and federal laws to ensure you maintain complete compliance.
Additional Common Property Types to Consider
While single-family and multifamily properties are the most commonly purchased by real estate investors, homebuyers, and landlords, there are more property types to consider, including:
Condos and Townhomes
Condos and townhomes are apartment buildings that share walls with other units, but they have their own private entrances. Condos tend to be smaller than townhomes and are often owned by individual unit owners, while townhomes tend to be larger and have more amenities like pools or gyms.
Condos and townhomes are a great way to get into the rental income game without having to deal with a whole house, and they can be easier to manage than apartments or duplexes. However, most condos and townhomes are subject to HOA fees and restrictions on what you can do with your property.
Foreclosed homes are properties where the owner can’t afford their mortgage payments due to financial hardship. They’ve lost the house, and it’s been taken back by the lender or another third party.
Foreclosures are often sold at an auction. Apart from auction houses, you may also search for real estate investing websites to find foreclosed homes in your area. One benefit of these properties is that you can get a great deal, likely at some discount to housing market interest rates.
However, foreclosure properties often require an upfront investment of time and money before they’re ready for tenants. Some foreclosures will require more intensive renovations than others.
A fix-and-flip property is one that has been purchased with the intention of renovating it for resale. These properties are usually bought at low prices and sold with a high return on investment, so they can be very profitable if done well.
The biggest pro is that they’re pretty easy to manage — you’re not typically dealing with renters, at least, not at the beginning of the process. You also get to choose when you sell the property, hence more control over time and money. However, securing financing for a fix-and-flip can be more challenging than other types of properties.
Commercial Real Estate
A commercial property is used for business rather than residential purposes (e.g., a restaurant or retail store).
One of the best things about these properties is that you may have more options to finance your purchase since commercial loans are often larger and more flexible than residential loans.
On the other hand, the down payment required for commercial real estate investing will likely be higher than for a residential property because there’s more risk involved in managing a commercial property. Commercial properties also tend to have longer vacancy cycles than residential properties due to the nature of their use. However, this can also work in your favor if you’re looking for a way to increase cash flow over time.
No matter how you choose to structure your real estate portfolio or what type(s) of investment properties you choose to pursue, we hope this guide has helped you better understand the options available to you.
As an added tip, we recommend diversifying your investment portfolios and building up equity over time. If you’re looking for an all-in-one property management tool, check out TurboTenant Premium! It has everything you need to make managing every property easy.