Should I Buy a Multi-unit Apartment Building Instead of Some Single Family Houses?

20 Nov Should I Buy a Multi-unit Apartment Building Instead of Some Single Family Houses?

There are real estate investors who insist upon buying multi-unit buildings. Others say that single family homes make the best rentals. So what’s better? Let’s explore the pros and cons of each by comparing a 4-unit apartment building to four single family homes.

The case for buying a 4-unit building instead of 4 single family houses:

• You have one roof to maintain, not four roofs. You have one heating unit, one yard, and one basement. Overall you may pay less for maintenance since there are fewer systems.
• When you send your contractors over, they can address issues efficiently in one place instead of driving from one house to the next. They can fix any issues in the building at once, so the response time for tenant repair requests may be shorter.
• You have less risk with vacancy, because even if one apartment is empty there are still three others rented. When a single family home is vacant, there is 100% vacancy.
• You pay less overall in loan fees because there’s just one loan, not four separate loans.
• There are other income streams possible, such as a coin-op laundry room, extra storage space rentals, and additional parking. Some landlords have cage lockers or sheds on the premises that tenants can rent. Some charge more for extra parking spaces or for a garage bay.
• You may end up paying less for insurance on a 4-unit than on four single family houses.
• One or more of the tenants may give you the inside scoop on what is happening at the property. For example, if another renter is holding raucous parties or constantly arguing with someone, your tenant may tell you about it.

The case for buying four single family houses instead of a 4-unit:

• You may have less tenant turnover and therefore a lower vacancy rate. You don’t have to worry about tenants complaining about noise from adjoining tenants. That can happen when you have common walls or someone else right across the hall who makes too much noise or has questionable guests coming and going. People tend to appreciate the extra privacy of a single family home over an apartment. Also, tenants in a house can typically host larger gatherings for family and friends than if they lived in an apartment.
• Tenants tend to pay more of the utilities. With a single family home, they can pay for water and sewer instead of the landlord paying for water and sewer for a 4-unit. With a multi-family building, you will likely have a landlord electricity account and have to pay for common area lighting.
• Tenants tend to take care of grass cutting and snow removal. With a multi-unit, you have to pay someone to cut the grass and shovel the snow. With a single family house, you can put the tenant in charge of all of it.
• When it comes time to sell, single family houses may be easier to sell because there is a bigger pool of buyers. Also, single family houses tend to fetch a higher price per square foot.
• If you need to sell one house, you still have three remaining. You don’t have to sell every rental unit just to cash in on a sale of one unit.
• There are more far opportunities to buy single family houses. There are more areas zoned for single family homes versus multi-units, so you have more options to own in neighborhoods that you like.
• Financing may be less expensive and may entail a smaller down payment per property. A borrower purchasing a single family home in their own name generally receives the most favorable rates and lowest fees. With Fannie Mae/Freddie Mac loans, typically a borrower only has to make a down payment of 15% to 20% for a single family house. You likely have to put down 25% for a 2 to 4 family property.

If you’re choosing to use an owner-occupied purchase money mortgage to buy your first investment property (assuming that you’re living in it for at least a year), then you’ll have advantageous financing for anything with 1 to 4 residential units. The rate and terms will be lower than what you would pay for a commercial loan or hard money loan.

A well-managed, well-maintained property will make you money over time if you purchased for a reasonable price. The question is whether single family homes or apartment buildings are better for you and your long-term strategy. I’ve owned both – I started off buying multi-unit buildings and in recent years have preferred to acquire single family homes.

If managing tenants is not your skill set or if you don’t have the time or desire, then a professional property manager is worth every penny. If you have systems, strict investing criteria, and a great team in place, then it comes down to finding lucrative deals of any size.

Some novice investors automatically assume that they should go after single family homes first and then graduate to multis. That’s not a bad strategy, yet you can go right after apartment buildings from the start. My first property was a 5-unit apartment building, and I bought a duplex five weeks later. I met an investor whose very first deal was an owner-financed 30-unit building! You have my permission to go for it!

Whatever path you take to building wealth and passive income, I want you to be bold and confident in doing so.

Tai DeSa is a graduate of The Wharton School of the University of Pennsylvania.  He became a full-time real estate investor in 2004 after serving in the U.S. Navy.  Tai has made colossal mistakes in investing (and learned some things along the way).  He has helped hundreds of homeowners avoid foreclosure through successful short sales. Check out Tai’s books on Amazon.com. Tai may be available for coaching and speaking engagements on a variety of real estate topics.  Send an email to tai@investandtransform.com.