New Rental Investment: Single-Family or Multi-Family?
If you’re looking into your next investment property, it can be tricky to decide between multifamily and a single-family home. To boil it down, our advice is that houses are only profitable when you get a good deal, but apartment buildings are profitable by design.
Of course, that doesn’t mean apartments are always better. Houses can be a great investment if you get a good buying price. Let’s take a closer look at the differences between the two and what they can offer in terms of returns, cash flow, and appreciation.
Single-family homes can offer a great return on investment through fix-and-flip strategies. By buying a property that is in need of repairs or renovations, fixing it up, and then selling it, investors can make a significant profit in a relatively short period of time. However, single-family homes can be more challenging to manage as rental properties, due to the fact that each property is unique and may require different maintenance and repairs.
On the other hand, multifamily properties, such as apartments, are designed with the intention of being long-term cash-flowing investments. They offer greater economies of scale, meaning that it is often easier to manage a larger number of units in a single location, as opposed to managing a portfolio of individual houses scattered throughout the city.
Multifamily properties not only mean all of your units are located in the same place, but they also tend to have more standardized systems, such as plumbing, electrical, and HVAC, which can lead to lower repair costs and increased cash flow. You can store all repair equipment in the building and know what each unit needs. With single-family homes, you will have to figure out the physical setup of each house, which increases repair time and cost.
This means that over time, multifamily has reduced operational costs and increased cash flow, making it the better option (generally) for a long-term hold portfolio. However, the ROI per unit is typically higher in single-family homes.
The profit margins per unit in apartments tend to be lower compared to single-family homes, however, when it comes to larger properties, the potential for significant financial returns increases. For instance, a large apartment complex can generate cash flow per unit ranging from $100 to $200, while single-family homes tend to generate higher cash flow per unit. However, when multiplied by a larger number of units, such as 20 or 50, the overall cash flow generated from an apartment complex can be substantial.
Appreciation is also an important aspect to consider when evaluating economies of scale. While a 20% increase in value of a single-family home is a good return, a similar appreciation in a 20-unit apartment complex can result in even greater financial gains. The larger the property, the more significant the potential for appreciation.
Considering these factors, it is advisable to utilize single-family homes for short-term capital gains and then reinvest those profits into long-term multifamily investments. This approach can help to maximize financial returns and create a well-rounded investment portfolio.
Ultimately, the best investment strategy will depend on your individual goals and risk tolerance. For those looking for quick capital gains, single-family homes may be a good option. However, for long-term investments with a focus on steady cash flow and appreciation, multifamily properties may be the way to go.