We get this question often from new investors: Should I buy a single family house, or a multifamily building like a duplex, triplex, or fourplex?
Let me first define the two different types of properties.
Single family refers to a house, a condo, even one unit of a townhouse (zero-lot-line or “common wall” structure). It means there is one unit for one person, couple, family, group of friends… whatever the tenant profile is… there’s one unit owned and rented out.
Multifamily refers to apartment buildings or entire apartment complexes, or on the smaller scale like a duplex, triplex, etc. These consist of multiple, rent-able units (“apartments”) serving multiple different tenants, but owned by one owner — or rather, considered “one property.”
Personally, I own some of both, as well as commercial space. Both single family and multifamily can be great investments in the Bellingham real estate market, but there are some key differences worth considering.
Note that these are not “across the board” hard and fast rules. But if you looked at a cross section of 100 of each type of rental, you’d see these patterns emerge. Let me list those out here:
Single Family Rentals
- Single family rentals tend to have longer-term tenants, so there’s less turnover, and therefore less vacancy and hassle of re-renting to new tenants.
- Typically, in Bellingham and Whatcom County, single family tenants pay ALL utilities including electric, gas, water, sewer, garbage, phone, cable… the works.
- Single family tenants take care of the landscaping maintenance and general upkeep of the home’s exterior.
- For first-time investors, single family rentals are easier to manage because of all the above, plus there’s only one tenant to manage versus multiple.
- Single family rentals are typically more affordable to buy up front, cost less to insure, and cost less in general because of the tenant paying utilities.
- Single family properties typically have a larger buyer pool when it’s time to sell, and are typically easier and faster to liquidate.
- Since most single family homes sell to owner occupants, single family property values are generally more affected by a combination of subjective desirability and market strength at the time of the sale, and almost not at all by rental performance.
- Down payment requirements for single family rentals is typically just 20%.
- Cap Rates are generally lower for single family homes, reducing the monthly profitability or cash flow for the investor.
- Multifamily rentals generally see a bit more turn-over in tenants, with many tenants moving on after 1 to 2 years.
- Multifamily tenants typically pay the metered utilities like electric and gas, as well as cable or TV service, but the landlord often pays water, sewer, and garbage.
- The landlord typically pays for (or does) the landscape maintenance for multifamily properties, as well as general exterior maintenance.
- Multifamily rentals are — by definition — more complex to manage because you have an increased number of tenants and potential problems, emergency calls, late rents, etc.
- Multifamily rentals are generally more expensive to buy and to insure, and when that’s added on to utilities and maintenance, the outflow of funds is greater for multifamily.
- Generally, there is a smaller buyer pool for multifamily properties, (though in and around Bellingham, WA the investor pool has been voracious!)
- Multifamily properties are generally valued (priced) more objectively, per their respective cap rate and the local market norms. This makes it easier to affect the resale value of the property by increasing net operating income, as opposed to subjective desirability that most single family properties must bow to.
- Down payment requirements for multifamily properties begin at 20% down for duplexes, but triplexes and above require a minimum of 25%.
- Cap Rates are generally higher for multifamily rentals, making it more likely to hit a positive cash flow or profitability on a monthly or annual basis.
- Note also that multifamily properties with more than 4 units require commercial financing, which has major differences from residential financing.
- Commercial loans have a fixed rate for only 5 years, then the rate becomes variable.
- Amortization period for commercial loans is 25 years, versus 30 years for residential.
- The appraisal fees for commercial can be 5X the cost of a residential appraisal.
- For these reasons, many investors and developers seek to keep their “small multifamily” under 5 units — that’s 2, 3, or 4 units only.
Again, these are some points to ponder — not hard and fast rules. Regardless of the type of investment you’re after, our firm at Brandon Nelson Partners is here to help.