Real Estate Investing: Single-Family Homes vs. Apartment Buildings
When you invest in residential real estate you either buy to rent or buy to sell. Buying to rent means you will have to pay for and maintain the property overtime, while renting to a tenant who will ideally offset the cost through the rental payment. Buying to sell means you buy the home to renovate, repair, and resell for a profit. When buying to rent, you have the option to buy a single-family home or multi-family units like a row of townhouses or apartment building, depending on your upfront capital and ongoing commitment. When you are deciding whether to go single-family or multi-family on your residential real estate investment, consider these four points: vacancy, management, maintenance, and capital.
A vacant home will not net you any profit and only cost you to maintain. A vacant single-family home costs you 100% of your potential profits, but a vacant unit in a four-unit building will only cost you 25% of your profit. A multi-family apartment building diversifies your investment and could help you cover costs even when you have a unit that is temporarily without a tenant.
When you are buying to rent, you have the choice to either act as the landlord yourself or hire a property management company. The best option for you depends on your proximity to the property, your budget, and your availability. If you live nearby and have the time to manage the property yourself, you will save the cost of hiring someone else, but you will be responsible for facilitating repairs and maintenance and answering your tenants’ calls. This responsibility is greater when you’re managing a multi-unit property. If you do not live near your property, or do not have the time to respond to urgent maintenance needs, it may be better to hire a property management company. This will be an added cost, but if you are dealing with a multi-unit property, it may be easier to keep up with everyone’s repair needs.
Like the home you live in, your investment home will require regular maintenance like landscaping, appliance upkeep, and sometimes bigger jobs like roof replacements. The larger the home the larger the cost to maintain it. A multi-family building housing multiple tenants throughout the year will cost more to keep up than a single-family home. Factor the ongoing maintenance cost into your budget ahead of time and determine what you’re prepared to take on.
Before you’re even running the numbers for property management and maintenance costs, you need to determine how you will be financing the property, and how much upfront capital you’re investing. According to Forbes, the down payment on a single-family home investment can be as low as 5% while the down payment on a multi-unit apartment building is typically 20-25%. If you sink in too much capital in the down payment you may not have the available funds needed to cover ongoing maintenance costs or pay the mortgage while you’re seeking tenants.
Before you invest in property, meet with a loan officer to discuss your goals and set a plan.