There are a lot of reasons why a rental real estate investment can be a great option. But, it might not be very clear as to which method of rental real estate will be the best. Investors often get confused as to whether they should invest in an apartment building or a single-family rental.
In this article, the top realtor in San Antonio has mentioned the pros and cons of investing in single-family rental and multifamily (two units or more). This will help you determine which method of real estate will be a better fit for you.
Once you start growing your portfolio and purchase more single-family rentals, you can sell or leverage individual properties as and when needed. If you are the owner of a 10 unit apartment complex and are planning to sell it, you will be getting rid of the entire cash flow.
However, if you own 10 different single-family rentals, you can sell two or three of them and not jeopardize your entire cash flow and income stream. However, the San Antonio realtor recommends that it is always wise to rent out your house instead of selling.
Residential real estate is comparatively cheaper to purchase. Hence, it becomes easier to acquire properties in different locations or markets. This also helps in diversifying the portfolio and allows you to benefit from the variety of properties. It also offers a high cash flow and has higher demand while hedging against the negative changes in the market like loss in job opportunities, higher vacancy rates, or other factors that could affect the rental income.
Owning single-family rentals doesn’t mean that you have a diversified portfolio. It means that you are broadening where the rental properties are located and that allows for diversification.
One of the biggest advantages of owning a single-family rental is that you can build up your rental portfolio as slowly or as quickly as you like. You can buy one new property each year or each decade as you like.
For new investors, purchasing single-family real estate is fairly common. This is because, in most areas, single-family properties are cheaper than commercial real estate. Leading institutions require a minimum of 20% down payment of an investment property. That means, if you want to buy a house for sale in San Antonio for 100,000$ single-family rental, you will need at least 20,000$ down payment money.
The lower upfront cost makes investing in a single-family rental more approachable. Especially when you are just beginning with your real estate investment journey. I will also offer you the same tax advantages and benefits of large-scale rental real estate.
If you own several single-family rental properties, its holding costs can add up quickly. You need to pay property taxes, insurances, and also maintenance and upgrades for each property. If there is a major expense like A/C or a roof needs replacement, the entire cash flow for the year will be eaten up.
Your income becomes wavy here if even a single property is vacant. If a single property is vacant, there will be no income. And if the unit stays vacant for a longer time, it significantly lowers the investment returns. This is because the expenses like property taxes, insurance, debt payments remain constant.
Generally, managing single-family rentals is easier than managing several units like apartment buildings. But, there is a certain limit. If you own multiple single-family rentals located in different locations, managing each property can become a challenging task.
Realtor San Antonio recommends that it is wise to take the help of a property manager if that is the case.
In a multi-unit investment like an apartment building, multiple rental units can be used to offset a loss in the rents from vacancy. For example - if 20% of units are vacant, 80% of units will still produce income. This allows you to cover costs like property taxes, debt services, or other property-related expenses.
The economy of scale is spreading fixed costs over the increased number of units. Property expenses and holding costs related to an apartment building are less than the portfolio of single-family rental properties because there are multiple units under a roof.
Property taxes, insurance, and management fees are fixed. The cost to replace the roof of a single-family home or small apartment building with six units under a roof is typically the same. As the number of rental units keeps increasing, your income to increases. This reduces your cost and makes it more cost-effective than multiple single-family rental real estate.
Multifamily properties have multiple rental units. This produces more cash flow at a faster rate rather than a single rental unit. Rather than buying several single-family rentals over a while, you can make maximum cash flow by purchasing just one building.
Managing an apartment building falls under pro as well as con. The same is the case with managing a single-family rental. On one hand, you’re managing multiple tenants in the same location under the same roof. This way, you don’t have to drive all over town. However, when there are more tenants and units to manage, you have more responsibility, organization and in general a lot of potential problems.
The biggest downside of investing in apartment buildings is their affordability. Multifamily properties are expensive and need more upfront capital to start with. Investors are expected to have at least 20% of the purchase price. Multiple opportunities are available to raise using syndications. This by far is the largest barrier and is often a reason why people invest in single-family properties first.
It depends on your personal preferences, your financial goals, and the funds you have to invest.
If you have the capital and would want to generate multiple income streams under one property, apartment buildings are a good investment. However, if you don’t have a lot of money to invest, but wish to benefit from the tax and financial benefits of real estate, it is better to start with single-family rentals and slowly build your portfolio over time.
Find out which method of rental real estate will make sense for you based on your time commitment, the funds you have, and your financial goals.
Still, wondering what the heck is a real estate investment? Make the right choice between single-family apartments or multiple units. Get started with your investment journey with top realtors in San Antonio.