28
May

Comparing Investment in Multi-Family Homes and Single-Family Homes in California

When it comes to property investment in California, it is relatively easier to just focus on deals that lie within your niche. While this might look effective, in reality, it shrinks the pool of opportunities you can take advantage of and this reduces your chances of potentially;

  • Diversifying your real estate portfolios
  • Enhancing returns/ mitigating risk
  • Multiplying your income streams.

When apartment building owners invest in single-family flips or when serial house flippers invest in multi-family homes, a new door of opportunity is opened for exploring. However, caution must be taken when investing outside your comfort zone; the risk vs reward of both property types must carefully weigh. In this post, the pros and cons of both investing in a multi-family home and single-family home in California will be properly examined.

Multi-family homes

Pros of Multi-Family Homes

Economies of Scale

This refers to the decrease in cost per unit as scale increases. When dealing with multi-family homes in California, the time spent in finding the property, accounting and undergoing due diligence is drastically cut. This is because the multiple units are considered holistically. In addition, you can leverage on the repair costs by spreading the cost over a bigger asset. For example, a structural design company in California will charge lower for the structural analysis for a renovation project of a multi-family home when compared to a renovation on multiple single-family homes; even if they are of the same magnitude.

Furthermore, it is relatively easier to manage tenants in multi-family homes compared to single-family homes where they are spread across different locations. Also, it is easier for landlords to strike more suitable deals with property managers and service providers like the service of an architectural design company when the units are located in the same position.

Steady Monthly Income

What happens when a tenant leaves a single-family home in California? It lays dormant; generating no revenue until it is occupied by someone else. However, with a multi-family home, the possibility of generating no revenue is unthinkable. This is because even if some apartments are vacant for whatsoever reasons like construction, restructuring, and so on, other apartments will serve as a viable income stream for that period.

Efficient Income

In considering income per square foot, a multi-family home will outperform a single-family home in California, on average, by a factor of 4. As an illustration, single-family home in California neighborhood might generate $4,000 monthly. On the other hand, a multi-apartment in the same neighborhood with 8 units costing $2000 each will generate $16,000 monthly.

Potential for Appreciation

The value of a single-family home is substantially affected by the surrounding properties and less affected by upgrades carried out. On the other hand, multi-family homes command a more advantageous method of valuing, making it easy for building owners to maximize their property value. For example, the value of a multi-family home in California can be increased by doing an upgrade like a remodeling by engaging the service of an architectural design company and a structural design company in California.

Multi-family homes in California

Cons of Multi-Family Homes

Tenant Turnover

Unfortunately, irrespective of how well managed a building is or how well the tenants are treated, tenant turnover is inevitable. Turnovers occur for numerous reasons such as family needing to move due to change or jobs or even kicking out tenants that refuse to pay their rent. Turnovers in a multi-family home in California can be escalated if too many units are unoccupied. Although, the risk of turnovers can be reduced by a good tenant screening process. However, proper plans must be made by the landlord to cater for any eventualities.

Higher Acquisition Price

To purchase a multi-family home in California, you need to make a down payment of at least 25% of the property value. This percentage is even higher if the landlord doesn’t plan to live on the property. Also, renovation cost, maintenance cost and the cost professional service involving architectural design company or a structural design company in California can run very high, therefore, requiring substantially cash reserves before purchase. Counter-intuitively, securing cash for financing the purchase of a multi-family home in California is quite easy. This is because more emphasis is placed on the property’s cash flow as opposed to the credit history of the borrower.

More Risk is Involved

Due to their larger size, they inherently carry more risk. Situations like an overdue construction process, challenges in securing tenants represents a huge loss to the landlord. Ultimately, the possibility of high cash burn rate due to debt servicing or unforeseeable expenditures is also inevitable.

Single Family homes in California US
Photo Courtesy of Wilkens Design Studio – Dwell

Pros of Single Family Homes

Smaller Cash Layout

Unlike multi-family homes, single-family homes require a lower amount of initial investment on things like renovation and maintenance. Also, a down payment of 10-15% instead of 20% is the trend for single-family homes in California.  Due to the lower costs involved, securing funding from investors is relatively easier. In addition, it is far much easier to secure a tenant for a single-family home than multiple tenants for a multi-family home. In the same line of reasoning, they can be flipped more promptly while multi-family homes require well-thought-out marketing schemes.

Its Value May Appreciate Faster

Multi-unit homes are usually valued based on their rental income stream. However, a single-family home is more influenced by its surrounding than any other factor. A market situation in which demands for single-unit homes skyrocket in a neighborhood with limited single-family homes will invariably raise the value of the single-unit homes enormously.

Single Family homes in California
Photographer: The Greg Wilson Group

Cons of Single-Family Homes

One source of Income

The biggest disadvantage of a single-family home is that it provides only a single income stream. What happens if the property lays dormant either due to turnover or major repairs? It will generate zero revenue, irrespective of the expenses it drains.

Also, in a scenario where there are multiple tenants interested in a single home, the landlord can only choose one. He/ She invariable losses the opportunities for additional income from other tenants.

How do I go about Multi-Family Property Investment?

If you decide to start out investing in different property types, the best advice we can give you is to start small. Fix-and-flip investors considering to become landlords can start out by investing in three-flat or duplex instead of taking on a multi-family building, We can also help you in the design process. This way, you can learn the rules of the game while minimizing the number of regrettable mistakes that can be made. With time, you will get more experienced and can then broaden your horizon and invest in bigger rental properties.