Why You Should Invest In Multifamily Instead Of Single Family Homes
Many Investors that are starting out seem to think that buying a home and leasing it out is the best way to go. Although there are some advantages in acquiring a Single Family Residence (“SFR”) there are as many disadvantages as well. The most pressing advantage for an SFR is that you can typically purchase them for less money down, allowing you to make use of today’s low interest rates and leverage the return. The low down payment can be the difference between investing now, and waiting years until you’ve saved up a larger down payment. However, keep in mind that lenders typically consider anything that is 4 units or less to be an SFR, so you can purchase a 4 unit building for as little down as you would a house. Of course, the main risk of investing in an SFR comes from the simple fact that if the property goes vacant you are covering 100% of the mortgage payment, taxes and insurance.
My experience with newer investors in the industry tends to drive them more toward smaller multifamily investments. Properties that have less than 5 units still fall under the guidelines for a residential mortgages so you still have the smaller down payment. The learning curve that comes with smaller properties is probably the best way to learn how you should be handling your larger investments. As you gain industry experience and expand your portfolio, or even if you choose to hire a management company you will then know what they are doing for you and have a better understanding. The biggest upside for me is that if you have a unit go vacant you will have other renters continuing to pay at least a portion of the mortgage. Also, there are synergies to having multiple units, and your expenses typically do not increase exponentially but rather are shared among all the units (for instance, a gardening bill will typically be the same whether it is for an SFR, or a 4 unit building; but you would have to spend 4 times the same bill on 4 separate houses).
If you are planning on owning a multiple unit building and living in one of the units, I do want to make you aware that if you do decide to live in one of the units, you should be prepared for your tenants to come to your door at all hours of the night with maintenance or rent issues. Or worse yet, if you have to evict one of your tenants for either non-payment or lease violations you open yourself up to possible retaliation. In fact, many owners I know hire a management company specifically for this reason, never letting the other tenants know they are actually the owners and just pretending to be another “tenant”.
As you are heading down the path as a new investor RISK is one of your biggest enemies, the less the better. Be smart on the acquisition as that is where your money is actually made, do your due diligence and be sure the title is free from all encumbrances or no potential for any in the near future.