What to consider when buying a single or multifamily residence.
Many first time investors have the idea that their first investment should be a single family home due to the cost of entry and ease of managment, however, this may not always be the best path to go down. One of the main issues that you have to consider is the fact that if the single family homes goes vacant you will have to cover the entire mortgage until you find a new renter, now if you have a duplex, triplex or fourplex that mortgage will be spread out across more units giving you some cash flow to help with the mortgage.
Another reason the first time investors tend to like the single family homes is that you can put a lot less down then you can on a commercial loan and the residential loan can be amortized out over the life of the loan. Residential loans can be on properties that have 4 units or less and can be acquired with as little 5% down, however, commercial loans are on 5 units or more will require at least 25% down and you will need to show a business plan plus as well as management experience and cash flow. When shopping for a commercial loan, be prepared to answer a lot of background questions regarding the property. Some of these questions include:
Who pays the utilities?
What types of maintenance are required?
Numerous questions regarding cash flow will also be asked. Commercial mortgage borrowers should be prepared to provide proof of business revenue and profits as well as a detailed plan for how the commercial property will generate enough income.
Where an investment in a residential property can be attractive is in the maintenance costs, you will have only one tenant in stead of multiple so it makes sense that your costs should be less providing you have a good tenant; however, multifamily properties typically afford synergies of scale (one yard, roof, etc…) so your overall cost per unit vs. rent will be lower.
When deciding on which direction to go with your first investment really look at your appetite for risk as having a home go vacant for a few months and having to cover all the expenses on your investment can be a big drain on your savings.