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Single Family VS. Multi-Family Rentals — What You Need to Know! (Part 1)

Single Family VS. Multi-Family Rentals — What You Need to Know! (Part 1)

Should you invest in single-family rental properties or multifamily rental properties? When it comes to residential real estate, this is the debate among new and seasoned investors alike.

While you can sift through juxtaposing opinions in online forums until you’re blue in the face, at the end of the day, it boils down to your personal criteria and investing goals.

In this article we will analyze single-family rental (SFR) versus multifamily rental (MFR) properties, so you can choose the best route for you.

Advantages of Single-Family Rentals:

1. Less Expensive to Get Started

One of the biggest advantages of SFR properties for novice real estate investors is that they cost less and require less capital upfront. While you can still find quality, cash-flowing rental homes for under $100,000 in the Midwest and South, even a small multifamily building could easily cost well over a million dollars (depending of course on how many units there are and which market you’re buying in). 

The higher price tag on multifamily properties means a lot of other things are going to cost more as well.

Conventional lenders typically require a down payment of at least 20% for residential real estate loans. So for a $100,000 property, you’d only need to put down $20,000.

Alternatively, if you’re hoping to finance a multifamily property with more than four units, you’ll likely need to seek funding via a commercial real estate loan. (Loan terms for two- to four-unit properties vary little — if at all — from those for single-family homes). Commercial lenders typically require a 25-30% down payment for apartment buildings. While this is only 5-10 percentage points higher, the increase equates to a substantial chunk of change. Translation: For a $1 million property, you’d need to have at least $250,000 for the down payment alone.

Additionally, most lenders require investors to have cash reserves to cover at least six months of payments for SFRs, and anywhere from 6-12 months for multifamily properties. Again, because an MFR property’s value is typically much greater, the necessary cash reserves are likely to be higher — even if the minimum time period (in this case, six months) is the same.

Further upping the entry costs, commercial real estate loans involve higher interest rates (typically 2-2.5% higher on average) and less attractive terms. There are also fewer banks to choose from, due to a smaller secondary market for the mortgagee to sell the loans.

Lastly, lenders also require additional qualifications for commercial real estate loans. Along with your personal income information and business tax returns, you’ll need to provide the property’s operating statements for the last two years and rent roll. Many lenders also require that you have some prior property management experience.

2. Greater Resale Opportunities

Of course, the flipside to SFRs being easier to buy is that they’re also easier to sell — but not just because of their comparatively lower price tag and lower barrier to entry. Since you can sell to both real estate investors and traditional homebuyers, single-family homes have a much larger buyer pool than apartment buildings and duplexes.

3. Growing Demand

Single-family rentals are the fastest-growing segment of the U.S. housing market, outpacing both single-family home purchases and multifamily housing. Real estate experts predict this growth in the SFR market will only increase in the coming years. 

According to U.S. Census estimates reported on RENTCafé, the number of single-family rentals in the U.S. grew by 31% in the decade immediately following the housing crisis (2007 to 2016), while multifamily rentals grew by only 14%. 

Student loans, credit card debt, and wage levels that lag behind the cost of living make it difficult for many potential homebuyers to afford a house. For this segment of the population, single-family rentals have become an attractive alternative. 

Adding to the demand, most millennials are entering the age range when people tend to start having kids, and the desire for a single-family home increases. The Urban Institute forecasts that the economic pressures listed above will drive many to opt for a rental home.

Adding to the upsides, SFRs traditionally experience less tenant turnover compared to MFR. This can represent considerable cost-savings when factoring in rehabbing and re-leasing costs.

4. Easier to Diversify

Rental markets fluctuate regionally. One city could be celebrating a boom in new businesses while another is struggling with the aftermath of a factory closure. If you’ve poured everything into a 10-unit apartment building and the local market takes a downturn, you may be harder hit than if your investments were spread out among several different SFR homes in various parts of the country.

And because SFRs have a larger buyer pool and generally cost far less than MFRs, it may be easier to cut one loose and reinvest elsewhere if the need arises. 

5. Lower Tenant Turnover

Tenant turnover costs time and money. Every time someone moves out, you (or your property manager) has to coordinate cleaning, repairing damages and general wear and tear, marketing and showing the listing, and screening applicants. And, of course, there’s the loss of rental income while the unit sits vacant. 

This brings us to the fifth upside for SFRs: They traditionally experience less frequent vacancies and tenant turnover compared to MFR, which represents considerable cost-savings when factoring in rehabbing and re-leasing costs. The average SFR tenant stays for three years — roughly double the average apartment resident’s tenure. And SFR tenancies of five or six years are not unusual. 

Financial pressures may be keeping many renters of single-family properties out of the buying market, but they’re still eager to grow roots. This means SFR tenants tend to think of the rental property as their own home and behave as such.

According to Zillow, among young adults, renters of single-family homes have always tended to move less often than apartment renters. And single-family home rentals are one of the fastest growing market segments. 

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