Risk vs. Reward
Single-Family vs. Multi-Family Real Estate Investments
Financing: Financing for single-family rentals is often through traditional mortgage or second home loans.
- DSCR Loans are also an option, however, ratios are generally more difficult to reach in comparison to a multi-family property.
- Other financing options: Seller Financing, Land Contract, etc.
Cash Flow: A medium to high equity position can justify the cash flow of a single-family rental if the aspects of an easier future sale are more appealing. However, multi-unit properties generally offer more cash flow potential.
Property Management: The cost of property management for a single-family rental is usually higher on a per-unit basis than for a multifamily rental.
Maintenance for a single-family rental is typically the owner’s responsibility and can be costly, especially for more extensive repairs (Roofs, Furnace, Foundations).
Vacancy: A single-family rental has a higher risk regarding vacancy compared to a multifamily rental, as the owner is relying on one tenant to pay the rent.
Inventory: There are generally more single-family rental options than there are multi-family properties.
Exit Strategy: The buyer pool for a single-family rental sale is large since it caters to most home buyers and potentially investors.
Financing for multifamily rentals up to 4-units can be residential loans or commercial loans.
- DSCR Commercial Loan
- Second-home loans
Cash Flow: There is generally more cashflow opportunity in multi-unit properties compared to single-family rental properties.
Property Management: The cost of property management for a multifamily rental is usually lower on a per-unit basis than for a single-family rental. More units will of course increase your overall spend on management.
Maintenance for a multifamily rental can be less expensive (per unit) than for a single-family rental, as the cost can be spread across multiple units.
Vacancy: A multifamily rental has a generally lower risk regarding vacancy compared to a single-family rental, as the owner is less reliant on each individual tenant.
Exit Strategy: The buyer pool mainly caters to investors and owner-occupants.
Basic Residential Investment strategies:
- Buy, Rehab, Rent, Refinance (AKA the BRRR Strategy)
- Buy and rent
- Fix and flip
1% Rental Rule
- Monthly rent income is 1% of the purchase price.
- Example: $200k house renting for $2,000/mo
70% Flip Rule
- The property’s ARV (after-repair value) is to be no more than 70-75% of the property purchase price minus the cost of renovations.