For a new real estate investor, the question of purchasing either a Multi-Family Residence (MFR) or a Single Family Residence (SFR) rental property can be tough. Like many things in life, there are benefits and drawbacks to each, so you need to identify what is best for you.
Why Invest in a Multi-Family Residence?
When you start comparing MFR (Multi-Family Residence) and SFR (Single-Family Residence) investments, it might seem like MFR properties generate more cash flow due to the larger number of units available for rent. However, the decision between MFR and SFR actually depends on your long-term goals for the rental property. Here are some reasons why investing in an MFR property might be beneficial.
Property Cost
We don’t deny that the overall cost of an MFR will surpass an SFR. But in terms of the cost per unit, an MFR’s cost is far less. Aside from that, with an MFR your expenses to maintain and manage will be less on a per unit basis. For instance, say you have 2 SFRs, and 1 MFR with 2 units. The MFR enjoys lower costs for things such as repair and maintenance. If you need to change the plumbing in the MFR, you can do one large job on both units. With the SFRs’ case, you need to pay for two separate plumbing jobs, which will mean a higher cost. However, your state may require an onsite employee if the MFR is greater than a certain number of units.
Financing
Even if an investor has the best credit, banks have restrictions on the number of mortgages an investor can hold, usually up to 10. But if you finance 10 MFRs with 5 units each, then you have 50 total units. You get to enjoy the cash flow from all those tenants as well.
Vacancy Expenses
If your SFR is unoccupied, then you have 100% vacancy. On the other hand, with a partially rented MFR, you can offset some, if not all, of the cost with the rent of the leased units.
Cash Flow
When investing in multi-family rental properties, it’s important to note that you can generate cash flow quickly, especially with newer units. However, keep in mind that these properties tend to not age well, which means that you will likely need to allocate more of your initial cash flow towards maintenance and upkeep costs. Therefore, it’s crucial to be mindful of this factor when deciding which type of rental property to purchase.
Why Invest in a Single-Family Residence?
When it comes to choosing between a Single-Family Residence (SFR) and a Multi-Family Residence (MFR), it ultimately depends on your goals. If you’re looking to invest in a property and see a higher return on investment in the long term, then SFRs may be the better option. Here are some reasons why you might choose an SFR:
Location
When it comes to rental properties, single-family rentals (SFRs) are usually found in more desirable locations than multi-family rentals (MFRs). The reason behind this is that SFRs tend to be located in neighborhoods that are more stable, secure, and have a lower crime rate compared to areas where MFRs are commonly located.
Moreover, renting a unit in a good location has numerous advantages. For instance, tenants are more likely to pay higher rents for properties located in safe and convenient areas with easy access to public transportation, schools, shopping centers, and other amenities. Additionally, properties located in good neighborhoods are easier to rent out since there is usually a higher demand for them.
Therefore, it is important for landlords and real estate investors to consider the location of a rental property before purchasing it. The old saying, “location, location, location” still holds true in the real estate industry. A good location can make all the difference in attracting and retaining tenants, increasing property value, and generating higher rental income.
Tenant Quality
Many property management companies will tell you that SFR tenants are more attentive to their properties than MFR tenants are. This occurs because SFR tenants view their unit as a home, rather than just a place to sleep and eat.
Tenant Turnover
Tenant turnover is often the greatest cost for a real estate investor. Longer renting tenants means that regular advertising, showing, and releasing your property are unnecessary. That’s why SFRs are often a better choice for a rental property.
Appreciation
SFR value typically increases over time, and so the opportunity to make money simply through property appreciation can be significant. So, what option is the best for you? That depends on your goals and situation. No matter what kind of rental property you plan to purchase, consider letting a property management company help you.
If you are interested in having your property managed by Real Property Management Metro Detroit, have more questions, or just want to speak to one of our team members, then contact us online or call us directly at 248-808-6550 today!
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