I’m asked almost daily if a new real estate investor should buy houses or apartment units. The answer isn’t cut and dried as it’s different for each person. Here are some of the important pros and cons of each.
Advantages of Apartment Buildings as Investments
Greater return. Usually, apartment buildings offer a greater return than single-family homes.
You start profiting instantly. You benefit from positive cash flows from day one.
You can afford to hire a property manager.
Disadvantages of Apartment Building Investments
High start-up costs.
Larger tenant turnover.
High maintenance and management costs.
Generally, a higher down payment is required.
Your great FICO score won’t help you very much when qualifying for a loan.
You need to educate yourself to determine how to identify a profitable opportunity.
There could be hidden maintenance costs you did not perceive or anticipate that could adversely affect your investment returns.
High out of pocket fees and expenses are required when qualifying your apartment investment deal with a commercial lender.
Advantages of Single Family Home Investments
Lower start-up costs. The down payment on an investment house can be extremely low.
Financing for single-family homes is readily available.
The acquisition costs are much less than for an apartment building.
If your rent is priced right, it can be very easy to keep a single-family home rented and to keep vacancy rates low.
Many single-family home investment properties will attract longer-term tenants, such as families with kids.
Disadvantages of Single Family Home Investments
If you lose your tenant then your cash flow goes to zero.
Cash flow is lower.
Maintenance costs can be excessive for a single house.
The taxes and insurance, per unit, can be much higher.
If you have multiple homes in different geographic areas, you may run yourself ragged.
Of course, there are also the “in between” type of properties. As long as you are under 5 units you have the option of using a conventional loan or a commercial loan. In almost all cases, a conventional loan will be easier to obtain and will cost you less, but it’s good to check both.
If you live in one of the units, the property can be considered “owner-occupied” which will save you even more.
Stated Income? You bet.
Cash Flow used for income determination? Yup.
If any of these are of interest to you, give me a call. Together we will analyze both commercial and residential options to see what is most favorable for you.