For property developers and real estate investors, two primary residential property styles exist in the United States - single-family and multifamily homes. The two main home styles differ in the number of units, shared utilities and amenities, cost, space, and privacy. Investment decisions between the two, for purposes of generating passive cash flow from the rental income, require consideration of the pros and cons of each style.
Single-family dwellings are designed for one family and are composed of free-standing residences. The house does not share a wall with any other structure on all sides (with townhomes being the exception) and sits on its own land parcel or lot as part of the property. Considering it houses one family, single-family homes have one set of utility spaces - a kitchen, a living room, and so on. The common single-family home styles include bungalows, townhouses, ranches, and split-level homes.
For real estate investors, one of the benefits of single-family homes is long-term tenancy - the average tenancy period is three years, compared to an average of two to two and a half years for multifamily dwellings. In this regard, the investor saves on resources otherwise spent on frequently seeking new tenants.
The single unit per parcel of land appeals to people seeking space, privacy, and a living environment with minimal problems with immediate neighbors. The living space tends to be larger than with multifamily dwellings - an average of 2,500 square feet compared to 1075 square feet. The peace of mind offered by single-family homes translates to high demand and a consistently high resale value.
On the downside, single-family dwellings require relatively high overhead fees, including costs associated with real estate agents, title companies, and attorneys, especially for new tenants. The recurring fees include repairs and maintenance, property management, property taxes, insurance, and possible homeowners association fees. These total expenses depend on the neighborhood, with affluent areas entailing higher fees, especially property tax. As the amount is sourced from a single unit rather than shared among multiple units, it can eat into one’s return on investment (ROI).
Secondly, the ROI decreases with vacancies. As much as families seek long-term leases, situations may change over the expected stay period. This disrupts the investor’s portfolio strategies. They often have to seek a new tenant as soon as possible to reduce the risk to the ROI.
On the other hand, multifamily homes refer to properties with more than one unit. The smaller multifamily dwelling setups include two units (duplex), three (triplex), and four (quadplex), which share walls, common utilities, and recreational spaces like a laundry area, garden, water tanks, and a swimming pool. Examples of multifamily dwellings include apartment complexes, condominiums, and mixed-use properties. The latter contains both residential and commercial spaces in a single building.
Secondly, multifamily properties are easier to finance, as they are deemed a lower-risk investment to lenders due to rental income from multiple units. Two financing options exist depending on the number of units. A conventional loan is usually possible for small multifamily homes with four or fewer units. However, more than four units require a commercial real estate (CRE) loan.
The CRE loan is a financing package covering multifamily buildings, warehouses, medical facilities, and hotels, among other properties. The difference with a residential loan, used for single-family homes, is that CRE loan lenders underwrite the loan based on the rental income the property will generate rather than the property’s value.
However, multifamily homes entail more responsibility and require more management than single-family dwellings. The chances of utility breakdown and dispute resolution between tenants are significantly higher. Other responsibilities include multiple tenant screening sessions, executing leases, and following up on rent payments. However, alongside property managers, technology and digital aids assist in facilitating and processing things such as rent payments and maintenance requests, regardless of the number of units, and with minimal physical contact.
