Single Family vs Multi-Family Real Estate Investment
Let’s face it, the old saying “there’s no place like home” is true for all of us.
Decades ago, the image of home meant a small Cape Cod style house with a white picket fence, maybe a dog sitting out front or a couple kids playing in the yard. Fast forward to today’s avalanche of interest in owning a real estate investment, which has become a hot commodity, not just a place to hang your hat.
Smart investors know there’s a wealth of opportunity out there to get into the market, and choices are plentiful, with something for everyone putting their toe in the water to test the temperature.
So, you’ve saved up enough cold cash to get into the red-hot real estate game. Congrats! You will have a dizzying array of choices to make, but one of the first is whether you opt for a single-family unit or a multi-family dwelling.
As you can imagine, a single-family home is a traditional house without shared space, such as a driveway, common walls or doors. Multi-family units contain separate residences for two or more families (or roommates). These include duplexes, triplexes and apartment buildings.
Single vs Multi-Family
Both single and multi-family properties have loads of potential…and also many pitfalls.
Let’s say, for example, you have the great fortune of stumbling on a property that includes the main house and two attached apartments (triplex).
You have a phenomenal choice to make: should you live in one of the apartments, or even the main house? Or should you rent out all three?
Maybe you decide to move into one of the apartments as an owner occupant because you’re smart and know the house will bring in a much higher rent. Then you attract the best tenants you can find (the kind that pays their rent on time, don’t disturb you after midnight with loud keg parties, or sneak in cats when the lease says no pets). This is owner-occupied property, and there are a ton of benefits to this option.
The Case For Multi-Family
Here are some of the reasons it’s a good idea to live in your new multi-family property:
1. You will also save money on interest rates.
Financing is faster and less complicated. Mortgage companies typically charge higher interest rates on properties that are not owner-occupied. You can also go the FHA route and get into a property with very little down.
2. You will look for high-quality tenants.
If you’re living in one of the apartments at the tri-plex, you won’t want to live next to troublemakers. Ok, maybe that’s being too judgey, but if you’re going neighbors, you’re going to be selective about who they let move in. Also, renters who plan to behave badly usually like to be as far away as possible from their actual landlord.
3. You will get write-offs on ownership expenses.
Owners that occupy their rental buildings have huge tax benefits available to them. They get to write off all of their rental expenses against their rental income. For example, if you have to repair a broken water main connection, sadly, tax laws won’t allow you to write off that repair to your personal residence. If the line for the tri-plex breaks and you live in one of the apartments, you can write off some of the repair costs to the units where your tenants live.
4. You can manage the property yourself.
Hiring a property manager can take 10 percent or more right off the top of your rental income. If you live there, you’ll be familiar with the tri-plex, keep it well-maintained, and you can fix things before they become a real headache.
5. You will be able to “babysit” your tenants.
Now, don’t get me wrong here. You can’t spy on your tenants or enter the units as you please. But you will have a better idea about what goes on in the apartments being nearby. That means your tenants are less likely to party the night away, smoke indoors, throw trash outback, bicker with the neighbors or anything else that can go sour without you there to keep an eye on things.
6. You will get to write off depreciation as the building ages.
You can get a credit on your taxes for the tenant-occupied sides of the triplex. Through depreciation, property owners claim a portion of their building’s value as a deduction against expenses every year, simulating the gradual aging of the building. Typically, the depreciation carries hundreds, if not thousands, of dollars a year in tax savings that a single-family homeowner isn’t legally allowed.
7. You’ll be eligible for itemized deductions.
These are the homeowner’s benefits. As the resident of a tri-plex, you get all of the same deductions as any other homeowner. You’ll be able to deduct a portion of your mortgage interest, property taxes, and any deductible points that you pay. You can use the Schedule A form to get all of those write-offs to get filed as itemized deductions.
8. Your rent will be received on time.
Tenants tend to slip the rent check under the door of your apartment or into the mailbox if they know you’ll be knocking on their door if that payment is late. Gone is the excuse of the rent check being “lost in the mail.” All they have to do is tape it to the door or stick it under the mat!
9. You can fix things in your pajamas.
When something goes wrong in the apartment or the rented house part of the tri-plex in the middle of the night, you can throw on flip-flops and run over to fix the leaky sink, running toilet, or check the fuse box. No need to pay $250 for an emergency call to a plumber!
10. Less property maintenance.
You will have only one shared lawn to mow, one flower garden to water, and if you live in the snow belt, one driveway to shovel. You can even work out a deal with your tenants, maybe they mow the lawn and you take $100 off the rent?
11. Higher income potential.
In most cases, there is more income potential as a multi-family real estate investor. Since you have multiple units that can be rented out, the rents will be higher! Think about what a 4 bedroom single-family would rent for versus four 1 bedroom apartments in a multi-family property.
12. Offset vacancies.
One huge benefit to going the multi-family route is that you have multiple apartments or units. The odds of all of your tenants moving out at once are extremely low unless you are the landlord from you know what. With a single family rental, you do not have other units to offset any vacancies. If your tenant moves out, your income goes right to $0 on that property until you can find a new tenant.
The Case For Single Family
Now let’s say you found an awesome single-family house, and since you already have a home you love, you decide to rent it out rather than living there. This, of course, is non-owner-occupied, and there are plenty of perks to this option.
1. You will have your own space.
That means you can wash your car in your Speedo (we don’t recommend this, of course), play horseshoes in the back yard at midnight (now this we recommend), turn up the volume on music when you’re cleaning your kitchen, or whatever other flukes and idiosyncrasies you’ve developed over the years. You’ll have the luxury of privacy, without anyone spying on you but your nosy neighbors (and that’s what fences are for).
2. You will have less day-to-day worry.
You won’t be there to witness your tenant backing up to within one inch of the garage door, stepping in the flower garden or denting the mailbox that they replace without you even knowing. Sometimes, it is best just not to know what goes on!
3. You can hire a property manager.
If you are living a distance from your single family rental, you can hire a property manager to take care of the day to day operations. This means no late night phone calls or fixing leaky sinks. One word of caution is it will be difficult for this to make financial sense unless you have a portfolio of real estate for them to manage.
4. You will have less temptation to micro-manage.
You won’t be able to track your tenant’s comings and goings. Maybe they left a trash can out at the curb for an extra night after pick-up. Or they ignored the free newspaper tossed on the driveway. Or left food on the stove and set off the fire alarms. These are all small nuisances you don’t need to worry about or even know about. If it’s causing an ongoing annoyance to anyone, they will complain.
5. You are not the lawn guy.
Who says you have to lug over a lawnmower every weekend or hire a plow to clear away snow when it storms? Write it into your lease that your tenants will take care of this, and you will save your own time or the money associated with hiring pros to do it for you. Cross that chore right off your to-do list.
6. Long term tenants.
If you rent out single-family real estate, you are more likely to attract, well, families! Here’s the thing about renting to families. Once they get a dog and have a swing set in the yard for the kids, they probably aren’t going to go anywhere! You may find that by renting to families that you have less turnover and fewer vacancies to deal with.
Regardless of whether you choose to invest in a multi-family dwelling or a single-family house, there are some serious benefits to owning real estate.
One of the most valuable aspects about investing in real estate is that you can buy it using only a small amount of your own money, then borrow the rest from a lender, often four to twenty times more. As a conservative average, investment properties appreciate by around 2 to 5 percent each year. Sure, there’s a mortgage to pay down, but if you’ve wisely calculated the numbers, what you’re earning in rent will cover the mortgage, and leave you with a little extra to put towards your next great real estate opportunity.
You’ll also see a great return on your investment of time and energy, and maybe learn some new handyman skills along the way. Go ahead, watch some YouTube videos about how to tear out carpet, remove old wallpaper, or start a new lawn in sandy soil. Learn how to install a dishwasher, stain a wooden floor and tape corners for a new coat of paint. All the work you put into your property will pay off when you have people vying to be your tenants because they love the place so much.