Investing in real estate offers many advantages, but there are various types of real estate investments to consider. You might wonder whether it’s preferable to invest in single-family homes or apartment buildings.
Let’s take a closer look at investing in both types. This might help you decide which is a better fit for your investment goals.
Why Invest In Single-Family Homes?
Many new real-estate investors cut their teeth on buying single-family rental homes. Why? Because purchasing a one-family property is less expensive than an apartment complex.
Lenders usually want 20% down when buying an investment property because non-owner-occupied homes are a higher risk. If you’re in the market for a $100,000 rental home, you’ll need $20,000 down.
But if you want to purchase a 10-door apartment complex that costs $800,000, you’ll need $160,000 down. This is why most first-time investors like single homes: Lower up-front costs makes them easier to acquire.
Note: If you’re just starting in real estate, one option is to purchase a two- or four-unit apartment complex and live in one of the units. If you do that, you might qualify for an FHA loan with only 3.5% down. FHA loans also have low rates and relatively easy qualification criteria.
Buying rental homes means you can build your portfolio at whatever speed you like. Purchase a new home each month, quarter, year, or whatever.
Residential rental properties are less expensive in general, so you can purchase more of them in different markets and neighborhoods. This increases your portfolio’s diversity so you can enjoy owning properties in markets with more cash flow or higher demand.
Diversification protects you from market downturns in the form of lost jobs, higher vacancy rates, declines in property value, and so on.
Why Shouldn’t You Invest In Single-Family Homes?
1. Management Issues
Managing a single rental property is more straightforward than dealing with a 20-unit apartment complex … to a point. But if you own 50 single-family homes across five cities, having to manage all of them becomes challenging.
When your single-family home is vacant, you have zero income. If it’s empty for six months, you have no income, but you probably still have to come up with a mortgage payment, insurance, and taxes.
Holding costs for rental houses add up. You must pay property taxes, home insurance, maintenance, and improvements for every home. If the roof fails, you might lose all your profit for the year.
Why Invest In Apartment Buildings?
1. More Cash Flow
Multi-family properties contain several rental units that generate more cash flow. Instead of needing to buy 10 single-family homes over a year or five years, you can buy a 10-unit apartment complex at one time.
When you have a 10-unit apartment building, you’ll still have income when one or two units are vacant. If you have a vacancy in a rental home, you have no income.
3. Economy of Scale
This means you can spread your fixed costs over many rental units. Holding costs and property expenses for an apartment building are lower than for an extensive rental home portfolio. You have many rental units in one place.
Why Shouldn’t You Invest In Apartment Buildings?
The biggest reason many people don’t buy apartment buildings is that they’re expensive. You may pay $500,000 or $1 million or more for a 10-unit building. Also, you need a more substantial down payment. This is the greatest barrier to buying multi-family real estate.
Apartment building management can be a mixed bag. On the plus side, you have all your maintenance in one address. But you have more rental units to manage and repair. That equals more management, responsibility, and problems.
So which is better: single-family homes or apartment buildings? Obviously, it depends! Personal preference, financial goals, and available capital typically dictate which rental properties you buy.
If you have more cash on hand and like having more cash flow under one roof, apartment buildings may be for you. If you have limited funds, you may want to start with rental homes and build a portfolio over time.
Investing in both property types can lead to long-term success. But you need to decide which is best for you right now based on the funds you have, time to manage the properties, and your long-term financial goals.
Article Submitted By Community Writer