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One of the first questions to answer after you have decided to invest in real estate is: “What kind of property should I invest in? A multi-unit building or a single-family home?”
Here are four considerations when deciding how to invest in real estate.
1. Vacancy
Vacancy rates have a significant influence on the potential of generating income from any property investment. And the type of property can impact your vacancy rates.
When you buy a single-family home, it is usually long-term. This means you either have tenants and rental income, or you don’t. Imagine if you had a single-family home that stayed vacant for a full quarter. You’d generate 25% less revenue for the year than if the property was rented year-round.
But what if you had a 4-unit apartment building, and one of those units was vacant for a quarter while the rest were rented all year? You’d only be down 6.5% for the year. Diversification is key here. The more units you have, the less you’ll feel a hit from any one vacancy.
2. Management
In property management, there are three main options:
- you can self-manage the properties,
- you can hire a property management company for full-time management,
- or you can hire a company to find, screen, and move-in tenants, then handle the day-to-day management on your own once the tenants are moved in.
Managing a single property is typically easier than managing an apartment building because there are fewer potential issues with things like maintenance and rent collection when you’re dealing with fewer units. A single property is perfectly self-manageable for most real estate investors, especially if you live near the property.
Full-time property management typically requires a fee of somewhere between 10 and 20% of the monthly rent. But if you have several units to manage, this fee could be well worth it.
The hybrid option could work for single-family or apartments. If you’re comfortable handling the day-to-day, you could just pay a one-time fee (typically 50% of the first month’s rent) to have a property management company find, screen, and move-in your new tenants.
It’s always best to plan for full-time property management expenses in case you decide at any point that the management requires too much time and effort on your end.
3. Repairs & Maintenance
While there are more opportunities for repair and maintenance issues with more units, apartments have a distinct advantage over single-family homes when it comes to capital improvements (like roofing, paving, and landscaping).
Consider a roof for example. The roof for a one-level single-home could easily be the same size as one for a 10-unit, multi-level apartment building. So the price for maintenance and repair would be the same for both types of properties. If we divide the expenses per unit, they are much lower for the multi-unit building.
4. Capital
One of the main reasons new investors often choose single-family over apartments, despite the higher vacancy risk and higher cost-per-unit of maintenance and repairs, is the required capital for the purchase. Single-family homes generally cost less than apartment buildings as a whole (of course the per-unit cost of single-family homes is typically more than each apartment unit). And, depending on your location and your lender, you may be able to put down a lower percentage to invest in single-family homes compared to apartment buildings.
Investing in apartment buildings typically requires greater capital. This is the simple but logical reason so many investors start with a single-family home.
If you have decided to invest in real estate, and you are wondering about options for capital and ventures, explore your options on sites like Roofstock. You can find different opportunities for diversification of the funds for purchase as well as opportunities to cooperate with other investors who work in the field of single-family homes. However, if you decide to invest in multi-unit buildings, you can also collaborate with investors to enjoy the returns as passive income.
Investing in the real estate market is always a good idea because people will always need a place to live. However, before you make the decision, do your research. Consider the pros and cons of investing in single-family homes and apartment buildings.
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