How to decide between a multifamily vs. single-family home
Buying a home is never an easy decision. You need to settle on your budget, the location, which features you cannot live without, and so on. However, there is another parameter you should take into account: should you purchase a single-family home or try your luck with an apartment building?
Buying a multifamily property may not be the first thing that comes to mind when considering purchasing a home. After all, most people associate this idea with the detached single-family house surrounded by a white picket fence that is an inherent part of the American dream. However, keep in mind that real estate is a long-term commitment.
For most people, buying real estate is one of the most important purchases they will make in their lifetime. Most mortgages have a term of 15 to 30 years. Even if you are not ready for a forever home, saving for a sizable down payment can take years. You will have an important share of your wealth tied up in the property, including regular maintenance, taxes, expenses, strategic improvements, and so on. As such, you should think about your home buying venture as an investment, whether you see yourself as a real estate investor or not, and decide on a strategy early on.
Single-family homes and multifamily properties both have their advantages and inconveniences. Here is how to decide what may be the best plan of action for yourself and your future.
What is the difference between a single-family vs. multifamily?
A single-family home is “a structure maintained and used as a single dwelling unit.” It is typically a freestanding construction, built on its own land, not sharing any walls or roofs with another unit. It also has individual access to the street, unlike apartments that share hallways and lobby access. Utilities – such as heating, electricity, water, and so on – are not shared with another property and only service the house. A single-family rental (SFR), is typically rented to just one person, family or small group.
On the other hand, multi-family properties contain several units. They are typically located within the same building, sharing a roof and walls. However, multifamily housing can also refer to several structures located on the same piece of land - for example, a main home divided into several apartments and a carriage house transformed into another unit.
Smaller multifamily properties containing two to four rental units (also known as duplexes, triplexes, and quadruplexes) are considered residential real estate, while structures with more than four dwellings are commercial real estate. Multifamily real estate can also have mixed uses, with some of the units being occupied by residents and renters while others are used as commercial spaces. A single landlord usually owns the entire property, unlike condos and co-ops, where each unit is owned by different people who must share decisions and expenses for common areas.
What are the local rules for single and multifamily properties?
Both single- and multifamily dwellings are subject to local rules and zoning requirements. For example, you may not turn your single-family home into multiple units by installing a kitchen and bathroom in the basement with the intent of renting it. You will need to disclose it to the city or town that may or may not allow it. They are sometimes more lenient on the creation of accessory dwelling units (commonly referred to as in-law apartments) that create independent living spaces, including additional kitchens and bathrooms but may not always be rented out depending on your local zoning code.
Single-family home advantages and inconveniences
Owning a single-family home is the goal of many Americans. Living in the house you have worked hard to afford always feels like an accomplishment. It can also constitute a good investment for those looking to make money from real estate. Here are the advantages and downsides you can encounter from buying a single-family vs. multifamily.
Pros of single-family homes:
Privacy: Buying a single-family home will give you a lot more privacy since they typically stand on their own land. You will not need to deal with noisy neighbors since they do not share walls. Single-family homes are also usually larger than multifamily units, giving you and your family plenty of room to roam, both inside and outside.
Costs: In most cases, single-family homes are cheaper than multifamily buildings to buy but also to maintain and insure. Besides, they are often easier to finance since many loans with advantageous rates and down payment options (government-backed loans such as FHA, VA, and USDA, for example) are only available for owner-occupied residential properties. Single-family properties are usually your best bet as you learn the ropes of homeownership if you have a limited budget and are looking for a starter home.
Simple investment strategy: Many real estate investors start their careers by purchasing single-family homes since they are more affordable. New investors with single-family rental properties only need to deal with one set of tenants, who usually take care of regular property maintenance and pay utilities themselves when living in a single-family home.
Besides, tenants in single-family homes tend to stay longer than their counterparts living in multifamily properties, reducing the tenant turnover and allowing landlords to build long-lasting relationships with their tenants. This reduces the need to work with an outsourced property management company. Single-family homes are also excellent candidates for house flipping (buying a distressed property under market value to fix it and resale it for a profit) since they are cheaper to buy and easier to sell.
Liquidity: The demand for single-family homes is higher than the one for multi-family homes, making them an easier asset class to sell if you decide that the property is not the right fit for your goals – either as an investor or as an occupant. Deciding on your exit strategy early on is an integral part of determining your return-on-investment, since the house often ties in a fair share of your wealth.
Cons of single-family homes:
Cost: As the sole owner of a single-family home, you are responsible for all the maintenance and expenses attached to it, such as property taxes and mortgage. Unlike apartment complexes, where the rental income from your tenant covers most, if not all, the costs attached to ownership, everything will come out of your pocket if you occupy your single-family home. And as any property owner can attest, the real estate market can be unpredictable, and houses can be very expensive.
More uncertainty: If you use a single-family home as an income property, having only one set of tenants in place can cause more uncertainty. Unlike apartment buildings, where other tenants can cover the running expenses while one unit is vacant, single-family investing means that landlords must cover all the costs while their rental properties sit empty. Finding new tenants as fast as possible can be stressful, and it is harder to create a consistent cash flow.
Lower rental income: With a single-family rental, your cash flow will be lower than collecting several checks every month.
Multifamily advantages and inconveniences
Being a landlord is an exciting choice. Whether you turn multifamily investing into a full-time career, are looking to create additional income streams while reducing your living expenses, or are considering creative ways to shelter your large family, multifamily properties open many possibilities. However, they can also come with a lot of struggles.
Pros of multifamilies
Rental income opportunities: everyone dreams to live mortgage-free. It can become a reality with a multifamily investment property. Many landlords choose to occupy one of the units while renting the others and use the tenants' rent to cover the mortgage payments, operating expenses, and hopefully a little extra monthly cash flow. It is an excellent choice as a starter home to build wealth before moving to a single-family home or for older people downsizing and getting ready for retirement. Having multiple income streams is also an excellent protection in case you lose your primary source of revenue, like your job.
Owner-occupied financing: While multi-unit properties are typically more expensive than single homes, you may still take advantage of advantageous financing terms (low down payments, credit score requirements, and interest rates) to purchase a 2- to 4- unit building if you occupy one of the units as your primary residence for at least two years. These economies of scale often benefit the bottom line of landlords growing their real estate portfolio.
Maintaining privacy in multi-generational households: families sometimes choose to live together with their parents or children. While this proximity can be welcome and sometimes necessary, it is also tricky to protect everybody's privacy, a situation that can lead to many tensions. In a multifamily property, each household can maintain its independence while staying close by if needed.
Scalability of investment opportunities: Real estate investors can scale up their business faster by taking advantage of the multiple sources of revenues with multifamily rental agreements in the same building. The risks are more balanced if one of your units is vacant or the tenants are not paying their rent. Your income grows faster, and your living expenses are lower if you live in the building as well. Finally, you can leverage the equity you build in your property over time to purchase another income property or your dream home. Besides, landlords have more opportunities to control the value of their multifamily vs. single-family homes that heavily depend on housing markets’ fluctuation. By implementing strategic improvements and raising rents accordingly as well as careful management, multifamily owners can quickly increase their property value.
Cons of multifamilies:
Lower quality of life: Even if you choose your tenants carefully, living within close quarters with other households can be a struggle. Between loud noises and disputes about general maintenance, it is not always comfortable to live in a multifamily. You will need to sacrifice some privacy and space to achieve your financial goals if you live in the property.
More responsibilities: Not everybody is cut out to be a landlord. Unless you are using – and paying – for a property maintenance company’s services, you will be the primary contact for your tenants for any issues, especially in an owner-occupied situation. You will be in charge of finding and vetting tenants to fill rental vacancies, contacting vendors for property maintenance, collecting rent, pest control, and so on. It can be very stressful and time-consuming, especially if you already have a full-time job. Besides, dealing with tenants is not always comfortable: you may need to enforce rents being paid in full and on time and also proceed to evictions if everything fails. Being a landlord can have far-reaching legal consequences that you will need to familiarize yourself with if you are up for this adventure. You can also hire a property manager to handle most of the daily tasks, even if you live on site.
Slower appreciation: Real estate is a long-term investment, and property values typically improve over time. However, the value of single-family homes usually improves faster than multifamily properties since it is easier to find single-family home buyers. It can be an issue if you run into cash flow issues and need to sell your apartment complex fast.
Harder to finance: If you choose to use the multifamily property solely as a real estate investment and not live in it, or if you want to buy an apartment complex with five or more units, the property may be more challenging and more expensive to finance than a traditional single-family home. You may need to seek help from non-traditional lenders if you are short on cash or if your debt-to-income ratio is too high.
Should I buy a single-family home or a multifamily building?
The winner in a single-family vs. multifamily contest depends on your personal short- and long-term investment goals and priorities. You will need to decide whether you privilege potential rental income over quality of life and privacy in the short term.
Both property types have their advantages and inconveniences. However, any real estate investment can provide excellent returns through appreciation or rental income and are a great way to diversify your investment portfolio.