Investing in Single Family Homes vs Multifamily Homes
Deciding which route to take
If you want to get into Los Angeles rental real estate, there are a few ways you can go. You can look into condos or houses. And if the latter is what you prefer, there's a question of investing in single family homes vs multifamily homes.
This is a debate among both experienced and new investors. You could go through forums for days and not get anywhere. Deciding what to do here doesn't depend on if the market is hot, normal, or cold. In reality, it all comes down to your personal criteria and goals.
So, today we'll try to help you find out what's better for you. We'll talk about the advantages of both options so that you can make an informed decision. Here's what you need to know.
Advantages of single-family rental homes
They're cheaper to get into
If you're a novice real estate investor, you'll be glad to hear that single-family rentals are less expensive to get started. In LA, houses don't come cheap. However, the difference in prices of these two options is very noticeable. In fact, you can expect to pay twice as much for a multifamily home.
And to continue with financing, you need to think about getting a loan as well. If you would like to buy a property with more than four units, you'll have to obtain a commercial real estate loan. This also means a 5 to 10 percent higher down payment, and sometimes that's not easy to carry out.
On the other hand, it can make sense to purchase a multifamily home if you're planning to reach out SOS Moving Los Angeles to and relocate there. If you and your family will be living there, this can even be a good idea. The more rent money you have coming in, the easier it will be to keep with your payments.
The demand is higher
According to research, single-family rentals are the fastest-growing of all US housing market segments. And if they're to be trusted, this trend will only increase in the years to come.
Nowadays, people are burdened with student loans, credit card debts, and wage levels. Because of this, many potential homebuyers can't afford to buy a house. So, single-family rentals are an excellent alternative for them.
On top of that, most millennials are starting to have kids. As we all know, they make a giant portion of the market. So, the demand only increases. Additionally, tenants tend to stay longer in single family homes as opposed to multifamily ones. Therefore, you'll save more money thanks to less rehabbing and re-leasing.
More resale opportunities
If you go with a single-family home, you'll have much better opportunities when you decide to sell it. We all know how quickly Los Angeles homes appreciate. So you can earn a lot of money in a short time period.
And it's not like you'll have any trouble finding someone to buy your property. Here's who could be your potential buyer:
First-time homebuyers and people who are downsizing
Other buy-and-hold investors
House rehabbers
Cash buyers
Builders
Therefore, if you're planning to hold on to the house for some time and sell it, there's nothing to think about when it comes to investing in single family homes vs multifamily homes. The first option is a path you should follow.
If you're thinking about investing in single family homes vs multifamily homes, know that the first ones are much easier to resell.
Advantages of multifamily home
They're easier to scale with
As a real estate investor looking to grow the portfolio, you'll be able to scale much faster with multifamily homes. For instance, if you want to acquire five new units, you need to find five separate houses. This means dealing with five different sellers, five inspections, and probably five mortgages. And if you purchase a five-unit apartment building, you can become a proud owner of 5 new rental units just like that.
It's important to be aware that lenders will ask you more questions if you decide to go this way. However, that is a lot less hustle than buying five different single units.
You'll also get a chance to enjoy the benefits of economy of scale. All of your new units will be under the same roof. So, fixing it will effectively fix all of them. Also, upgrading the common area will increase the value of each of them.
You get where we're going with this. Your costs per unit will be significantly lower. All of your showings, regular maintenance routines, and inspections will be happening in the same place. And if any of your new tenants have trouble transporting their belongings across LA, local professionals can easily deal with this.
Better cash flow
The rental income from single-family homes can be higher only if you have a few of them. You'll also be much less likely to experience a zero rental income. If your tenants move out from one unit, you still have a couple of them to cover the costs. And if the same happens with a single-family rental, it's completely vacant.
However, there are a couple of things to remember here. Firstly, higher cash flow doesn't necessarily have to mean a better ROI. Of course, more renters will be sending you checks every month. But that's just a fraction of the complete equation of overall return.
And the second thing is that more tenants equal more wear. So, it may become more difficult to avoid financial stress in the future, as more of your income may go towards maintenance.
You'll get more money from rent each month with the multifamily property.
They can be easier to finance
Because of the cash flow we just talked about, it may be easier to obtain a loan for an apartment building than for a single-unit house. The reasons for this are simple. The chances that cash flow from a property like this will completely dry up are slim. So, it can be a safer option for lenders.
Prices of single-family houses depend on the real estate market. However, the value of a multifamily home is determined by the income it generates. So, you may be able to get a better financing deal and better terms.
To conclude…
All in all, there's no clear winner in the battle of investing in single family homes vs multifamily homes. Both options have their pros and cons. But if you know what you're after, you won't have any problems determining what works the best for you.
