There are many good reasons to invest in rental property. You can collect rental income in excess of your ongoing expenses, yielding an immediate profit, and eventually, you should be able to sell the property for more than you originally paid for it.
Within the realm of rental property investment, there are many sub-strategies you can follow. Most experienced investors tend to favor multifamily properties, which offer distinct advantages like better protection from rental vacancies and higher overall income. However, if you’re new to the world of investing, you might prefer to choose a single-family rental property as your first investment.
The Advantages of a Single-Family Home
Why would you choose a single-family home as your first investment?
- Easier purchasing. First, most people will have an easier time purchasing a single-family home than they will a multifamily home. The price of a single-family home is often lower than a multifamily counterpart, especially as you start adding more units. In some areas, you can get a reasonable home for $1-200,000, but an apartment building can cost $1 million or more. The more expensive the property, the more strings you’ll have to pull to get financing, and the more of a down payment you’ll have to provide to get the property. This makes it difficult for a first-time investor to get the money or financial support they need to get a multifamily property. The deals are also easier to negotiate, requiring less back-and-forth, and involving less competition from other people.
- Ample options. For your first property, you’ll probably want something uncontroversial and profitable, but this can be difficult to find in a multifamily property—especially a large apartment building. There may be only a handful of multifamily properties available in your target area, but there will likely be far more single-family properties available. Among those single-family properties, you should be able to find at least one that suits your needs. You should also be able to find a wide diversity of different single-family properties, with different values, different ages, and different layouts, so you can find a property that will serve you best in your early-stage real estate investment strategy.
- Lower complexity and fewer regulatory hurdles. As a landlord, you’ll be expected to keep your buildings and your operations in full compliance with the law at all times, regardless of whether you’re overseeing a single-family or multifamily home. However, in most areas, multifamily residential properties are subject to more rules and regulations than their single-family counterparts. For example, you’ll face tighter restrictions on the availability of things like emergency exits and the setups of your utilities. For experienced real estate investors working with a network of lawyers and contractors, these forms of increased complexity aren’t really a concern. But to a newcomer who’s unfamiliar with even the basics of being a landlord, it can all be intimidatingly complex. For this reason, it’s often better for new investors to start with a single-family property, and become familiar with the laws as they go.
- Fewer time commitments. No matter what, your rental property is going to require you to spend time managing it, performing responsibilities like collecting rent, fixing things that break, and taking care of the lawn. You can try to take on all this work yourself, or hire a property management firm to take care of those responsibilities for you. Either way, you’ll have to pay for it. It’s just a matter of whether you pay for it with time or money. Multifamily properties generally come with higher time commitments, since they have more units to manage and more regulations to follow. This makes single-family properties ideal for novices.
- Fewer unplanned expenses. One of the biggest kinks in any real estate investment strategy is an unplanned expense. Appliances can break, weather can damage your property, and tenants may leave your property in total disarray. While unplanned expenses can affect both single-family and multifamily properties, for the most part, unplanned expenses in single-family properties tend to be less expensive; the properties are less valuable, they’re less complex, and there are fewer units that can be affected. If you’re especially sensitive to unexpected expenses, single-family properties are likely the better choice.
- Less financial risk. Speaking of financial risk, single-family properties tend to be less risky, and for several reasons. They’re less expensive, and require less financing, so you won’t be on the hook for as much money if things go wrong. There are also fewer variables to account for; if your calculations are off in a single-family property, you’ll face fewer costs than if they’re off in a multifamily property. When it’s time to sell, you’ll probably have an easier time getting rid of a single-family property than a multifamily one. Accordingly, if you’re interested in cutting your teeth with a low-risk property, single-family rentals are the way to go.
Graduating to Multifamily Properties
The idea is to use single-family properties as a way to gain experience (and make money), which you can then use to purchase more properties, or go after a multifamily property. So when is the turning point? At what point does it become better to invest in multifamily properties?
The answer isn’t so clear, since there are too many variables to consider—including your personal risk tolerance, and the nature of your local real estate market. In some conditions, it makes perfect sense for even an amateur investor to purchase a large multifamily property as their first rental property. In other conditions, it makes sense to continue adding single-family rental properties to your portfolio. There are few “right” and “wrong” answers in the field of real estate investment, so make sure you choose the options that work best for you and your goals.
If you’re interested in investing in a rental property, but you don’t know where to start, contact Green Residential today! We can help you find and purchase a property that fits your needs, or provide the property management services you need to keep the property up-to-date and profitable.
Michael is Green Residential’s Vice President. He helps to keep the team organized and running smoothly. Prior to joining Green Residential, he spent 12 years working at Cadence Bank in the mortgage loan servicing department, where he specialized in loan audits, modifications, and bankruptcy-related issues for the mortgage portfolio.
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