A residential property can serve as a home or a source of rent. Residential home buyers often choose between a single-family home and a multifamily property. Compared to a multifamily property, a single-family home does not share a wall, roof, or utilities with other units. This article focuses on the benefits of buying a single-family home over a multifamily property from a business perspective.
Benefits of Investing in Single-Family Homes for Rentals
The prevailing market prices for single-family homes are considerably lower than multifamily. Consequently, it is easier to finance a single-family unit using savings and modest loan financing. Therefore, the buyer can own the property quickly and avoid debt burden. In comparison, multifamily homes require a substantial capital injection. Often, multifamily homes come at the cost of a long-term mortgage or loss of business control to equity investors.
High Appreciation Rate
The price appreciation for single-family homes is higher than in multifamily property. Customarily, valuation for a single-family home considers the supply and demand of buyers purchasing the property as occupants. Thus, considering the ever-decreasing luxury of private land, demand for single-family homes is high, and supply is declining. This reality increases their value. Conversely, multifamily homes are valued using the property's condition and the total rent generated. Thus, price appreciation depends partly on the ability to increase rent, which is limited by the increasing supply of multifamily units.
High Cap Rate
Single-family homes have a high capitalization (cap) rate compared to multifamily property. The cap rate is the return on investment based on the net operating income generated by a property. In practice, the formula for calculating the cap rate divides the net operating income using the current market value of an asset. The net operating income indicates the annual income of a real estate property after deducting operational expenses. The cap rate for a single-family home is high due to fewer operational costs associated with property management. For example, tenants in single-family units may pay for their utilities and take good care of their units due to personal attachment.
High Rates of Return
The rate of return on investment for single-family homes is higher compared to multifamily homes. The argument for investing in multifamily homes is the assumed economies of scale. However, the costs of management for such properties are high. The more units you own, the higher the number of vacating tenants at the same maintenance price. In comparison, a single-family has low turnover. More so, managing a single-family house requires minimal management and maintenance costs. Ultimately, an income and expenditure analysis for a single-family unit would be more favorable than a multifamily asset.
Ultimately, buying a single-family house depends on the investment objective. A single-family home will offer more returns on investment and long-term value based on low maintenance needs and changing market dynamics.
Contact a local real estate agent to learn more about single-family homes.