One of the first choices real estate investors need to make is whether to buy single-family apartment buildings or homes. Most experts would like to make a case for why single-family properties or portfolio houses usually make better investments, especially if they are just getting started.
Lower the price tag
Depending on where people invest their hard-earned money, they could buy a house for less than a hundred thousand dollars. That lower price tag means a lower DP or down payment. It is a lot easier to come up with 20% of one hundred thousand dollars compared to when they need to come up with 20% to 30% of a million dollars.
With a lower price tag, comes with the option of dealing by yourself; individuals do not need to set up partnerships, as well as complicated business structures to help them raise equity capital. The bite-sized monetary requirement means people can grow pretty slowly and expand as they are ready.
A manageable size
Single-family homes are a lot smaller compared to apartment buildings. These things are cheaper and easier to maintain when it comes to gross costs. If the property’s furnace goes out, it is at least a thousand dollars; if it goes out of the apartment, then it is at least ten thousand dollars.
Smaller structures are less complicated when it comes to usage and construction. It only costs a couple of hundred dollars and a couple of hours to check single-family homes. It can easily cost at least ten thousand dollars to conduct because of diligence on apartments. It also takes a lot of expertise and time. Home inspectors, as well as surveyors, are all property owners who need to check single-family houses.
People with basic math skills can check the estimated expenses and income, as well as the accounting part of the process. It takes weeks or months to conduct research on apartment buildings. If people make mistakes or miss something on apartment buildings, it could be easier for property owners financially. If they miss something on single-family homes during the research period, it is going to be good for them.
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More options when it comes to financing
There are more advantageous financing options for single-family homes compared to apartment buildings. People can also get lower DPs. Most lending firms or financial institutions advertise that they do 75% to 80% debentures on apartment buildings. Still, individuals also need to meet many other criteria, like debt coverage ratios.
Even though financial institutions may loan up to 80% of the value, it is not uncommon for banks to back out of the deal with approval for 60% of the purchase price since the financial institution decided to be pretty conservative with incomes or they are liberal with expenses.
Individuals can finance single-family homes with most of the same commercial debentures readily available to apartment property investors if they want. Investors of these houses also have other options when it comes to financing with conventional home debenture products, so they can be confident that a 20% DP will get the deal done.
A lot easier to sell
If individuals have a portfolio of these types of houses, they can sell them individually or as a package. Individuals can market their properties to retail buyers or commercial investors. They can also keep other properties and sell some if they choose.
Retail buyers aren’t constrained by debt coverage ratio or capitalization rates. Property owners will usually pay the appraisal fee, which is not tied to the rental income in their area. They can sell single-family houses in a couple of months, but apartment buildings could take them years to sell.
More houses to choose from
There are more single-family properties compared to apartment buildings, and individuals can find excellent bargains with little to no work. The key is to purchase a property with equity on the first day and not just an old house off multiple listing services. The value of the house will help individuals safely and steadily build their wealth and portfolio.
A lot safer to build wealth within the person’s means
Most investors have charged in various deals that exceed their management abilities and financial means. They need more cash in their bank accounts for unforeseen circumstances or expenses, and they need to have the right experience to manage their properties properly. It always results in disaster.
It is better to slowly turn one home into two and so forth as owners build their portfolios while they increase their experience and savings. A lot of experts try to purchase homes for families at a lower price, enough that they have about 20% equity in their property after all of the costs.
There is a good chance that they will bring 20% to 30% of their personal money into the deal, but they can refinance the house and pull all or most of their funds out of the property once it is stabilized. Then they can immediately go purchase another property and repeat the process.
Investing safely needs three important factors: cash reserves, cash flow, and equity. People need wiggle room in their houses. They are always in a fragile spot when there’s no wiggle room between what they have put into their house and what they can sell it for.
The most important safety factor is cash flow. Homes need to be paying the owner more than it costs to operate and own. If the house is profitable, then owners can keep it and sell it on their terms. Selling when they want is a lot better compared to selling because they need to.
Cash on hand is very important when it comes to overcoming bumps along the way. If people expand their investment portfolio of single-family homes in a smart way, they can achieve as well as maintain all of the important factors at a safer level.
Some individuals see most of the benefits mentioned above as disadvantages. For example, a heater in an apartment building is more expensive in total, but it is a lot cheaper compared to the one inside a single-family home if owners base it per unit. Individuals have more opportunities to lower their per-unit upkeep costs in buildings. Purchasing homes in different locations are excellent for diversification, but it dramatically increases a person’s management costs. It is not about picking the best available investment; it is about picking the investment that suits you best.
