Residential real estate has traditionally been correlated with long-term growth trends in the United States. It has also historically been a source of healthy returns for many successful investors.
As the term implies, a single-family home is an individual residence that’s designed to accommodate the needs of one family unit. In most cases, it is a freestanding building constructed on a parcel of land owned by the person who also holds title to the structure.
Individual condominiums, where a single building has multiple residences titled to a variety of different owners may also be considered single-family rentals.
Advantages of investing in single-family properties include:
A lower barrier to entry – Investing in a single-family home as a rental property is as easy as buying your first home, living in it for five years, refinancing it and using the equity to purchase a second home. Many single-family investors follow this strategy, which can be successful if demand for real estate remains healthy, and can be more profitable in an environment of low interest rates, as the cost of financing an additional unit is more easily offset by rental income. If successful, an individual may reach retirement age with a portfolio of several mortgage-free single-family rental properties.
A more limited capital commitment – As these properties are generally less expensive than multi-family units, they do not require as much capital. A single-family property can be financed with a 20% down payment, compared to 25 to 30% for a multi-unit building. Lenders also tend to impose a cash reserve requirement of up to 12 months on borrowers for multi-family buildings, while single-family loans usually only require six months of reserves on hand.
Higher liquidity – Single-family properties typically attract more buyers than multi-family ones, mostly due to the fact that there is demand from first-time homebuyers in addition to investment demand. The more limited capital commitment required to invest in single-family homes also facilitates geographic diversification, with investors potentially buying and selling in different areas depending on regional and local market conditions, as well as personal preference.
A wider pool of potential tenants – Single-family properties have a larger potential tenant base. Young families usually prefer homes to apartment buildings so their children have a safer place outdoors in which to play. Single people also may tend to prefer living in houses and will often share the costs of renting a home with roommates.
A lower turnover rate – Comparatively speaking, single house renters tend to stay longer than large apartment building renters for multiple reasons. Young families often rent homes to get their children into certain school districts, and moving could mean pulling them out of school. Moreover, single-family residences tend to be quieter and less prone to conflicts between neighbors.
On the flip side, there are disadvantages such as:
More limited revenue streams – While cheaper, single-family home investments are tied to a single rent payment or a limited amount of rent payments. The tenant’s ability or willingness to pay has the potential to make or break your investment.
Vacancies can be costly – A multi-family building will almost always have at least some tenants making rent payments. On the other hand, a single-family property does not provide any cash flow from when a lease expires up until a new lease is signed. In the hiatus, an owner will usually have to sustain expenses such as repainting, cleaning, repairing damage, and marketing. All these activities have associated costs, which compound with the mortgage payment and taxes that are still due. In extreme scenarios, an investor may be forced to sell the property if it sits vacant for too long.
Cumbersome to acquire multiple properties – Building up a portfolio of single-family rentals can be time consuming. Each new property acquisition requires going through a similar procedure – which includes property search, price negotiation, a mortgage application, a location inspection and an escrow payment. This can be cumbersome and discourage scaling compared to the alternative of purchasing a larger multi-family building.
Multi-family properties are residential real estate developments that cater to multiple users, ranking in size from a duplex – in which two homes share a common wall – to an apartment building comprising hundreds of units. Smaller multi-family units like duplexes often serve as an attractive entry point for first-time investors because a portion can be used by the buyer as a living space, while the other one is rented. Owner-occupied buildings of four units or less can typically be financed almost as easily as single-family units.
Multi-family properties of five units or more are generally treated as commercial real estate, and require more stringent – and more expensive – financing procedures, as well as larger capital commitments. Multi-family properties can also cater to a specific demographic – such as students, or the elderly.
Learn More About Growth REITs
Advantages of investing in multi-family properties include:
The opportunity to leverage through multiple mortgages – Under Fannie Mae and Freddie Mac guidelines, to which lenders must adhere, a single investor can have a maximum of ten mortgages at any given time. Each multi-family property of four units or less only counts as one of those mortgages. This means an investor can purchase 40 units of multi-family rental properties under 10 conventional mortgages, as opposed to 10 single-family properties.
A lower unit cost – While the overall purchase price of a multi-family building might be higher than that of a single-family home, the price per unit is often smaller, allowing for a potentially larger upside.
A steadier revenue stream – As cash flow is generated by multiple units, there is more limited volatility. In a four-unit building, for instance, the loss of revenue from the vacancy of one unit only partially affects total portfolio cash flow. That is, you’ll still have three other units generating revenue.
Better economies of scale – In a four-unit building that needs a new roof, the repairs on the common roof will be beneficial to all the apartments. This means the cost is distributed across four units, and the increase in value is multiplied as it concerns all four units. Other costs such as the ones generated by insurance, showings, routine maintenance, and inspections can also be better optimized.
Potential for rent-free living – You can harness savings by living in one of the apartments, and owner-occupied buildings often qualify for more favorable financing terms, including FHA and VA loans. This can mean down payments as low as 3.5% for FHA loans and 0% for VA loans.
Tax advantages – Multi-family properties can be depreciated over a period of 27.5 years — even if the value of the property appreciates. This can offset rental income and improve profitability.
On the flipside, there are disadvantages such as:
Maintenance Issues — Some maintenance costs cannot be optimized. Every unit has an HVAC system, plumbing system, electrical systems, floors, walls, doors, — all of which may require maintenance . In addition, objects such as refrigerators, stoves, dishwashers and garbage disposals also require maintenance, which can be costly if they are provided by the owner. The larger the number of units within the building, the higher these expenses will be.
Additional marketing costs – You’ll have to advertise, conduct showings, process applications and conduct background checks every time a unit goes vacant — which tends to happen more often than with single-family properties. While you can hire a property management company to take on these activities, doing so will narrow your profit margin.
A potentially slower rate of appreciation – Because their market is more liquid, single-family properties can experience more rapid appreciation. As we mentioned above, the marketplace for single-family homes is wider because the customer base includes potential homeowners as well as investors.
Building Management Issues – Short of hiring a building management company – which can shrink profit margins – the investor may be in the position of having to mediate between tenants, if issues arise between them.
Invest In Growth REITs
The good news is that one type of investment doesn’t exclude the other. Many people start out with a single-family property in which they live, and subsequently refinance it, using the equity to acquire additional property. This is a good way to test your willingness to become a landlord. Some of these investors then progress to multi-family dwellings.
Directly owning real estate is only one way to access real estate returns. In order to gain exposure to the asset class without such a capital-intensive and time-consuming investment, investors on our platform can access Real estate investment trusts (REITs), which are tradable securities that can be transferred much the same way bonds or stocks can. Purchasing shares in a REIT entitles you to a share of the income the trust’s holdings produce while sparing you management costs and duties.
Yieldstreet’s Growth & Income REIT is an equity investment in commercial real estate properties across key U.S. markets and property types. The Fund’s primary investment objective is capital appreciation and its secondary objective is current income, which can provide the opportunity for capital gains, as well as a potential steady passive income stream.
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