Which is a better investment; a single-family property or multi-family one? This is a question that is often asked in the realm of property investments. At first sight, the answer is easy. Both are worthy investments in their own right. Both types of properties will generate cash flow when rented. However, upon closer inspection, differences between the two emerge. With a little digging, the answer as to which is a better investment is clearly evident. Here are four reasons why a multi-family property is better than a single-family one.
Less Cost per Unit
The same financing programs that are available for single-family units are available for multi-family (up to four units). When you average it out, the amount per unit will usually be less than that for the single-family home. Since this is an investment property, the higher price of the single-family unit will reduce your overall cash flow. Sure, you can divide a single family dwelling into different units, however, the central infrastructure such as the electricity and water costs will still be that of a single-family dwelling.
Lower Operating Expenses
With a multi-family investment, you will save on operating expenses. Single-family investments will be scattered and will not be concentrated in one area. This will lead to increased operating expenses. However, with multi-family investments, you will have all of the rental property on one site and thus saving on operating expenses. In addition, the management of a multi-family investments will also be streamlined and not as complex as that for single-family investments. Managing rental units in one location is simpler than having to do this across several miles.
Diversification of Income
Multi-family investments allow you to diversify your income since they consist of many units under a single roof. If one of your tenants moves out, your income will not be as affected as it would be for a single-family dwelling. This is one of the main reasons why a multi-family investment is preferable over a single-family one. In addition, you could charge different rental rates for the different units in a multi-family dwelling creating multiple income streams on one property.
Building to Land Ratio
Since land is a non-performing asset, having as many income generating units on one piece of property is advantageous. Single-family investments do not provide as many income generating units as do multi-family investments. This is simple math. Even though you can divide a single-family investment into many units, it will not be as divisible as multi-family units, which will generate more income. One thing to note here too is that you could also divide a multi-family dwelling as well.
While a single-family and multi-family investments may seem equally matched on the surface level, after performing due diligence and looking closely at the two different types of investments, the multi-family one is the clear winner. Not only will it cost less per unit when you are first purchasing it; it will also generate more overall cash flow as an investment. A multi-family unit provides a greater building to land ratio and will allow you to diversify your income streams.