Home Vs. Apartment Investment: Which One is Better?
There are various ways to invest in Real Estate. Two of the most common methods are purchasing single-family homes or apartments as rentals. At JB2, we have explored both avenues for many years. Each has its pluses and minuses, but ultimately, we have grown to prefer apartments over single-family homes as a rental.
So, let’s break down why we prefer apartments and some of the pros and cons of each.
Valuing Rental Property
A big way that homes vary from apartments is the way they are valued. Homes are valued based on comparable sales in the same area. Apartments are valued based on rental income, which establishes a cap rate, the most used metric in valuing multi-family. We like values being based on income. With this approach, we can force appreciation by increasing income or reducing expenses. In addition, it puts more of the control in our hands compared to depending entirely on what other homes are selling for. This can be an issue during recessions for single-family homes, as prices can be hit drastically.
Economies of Scale in the Real Estate Business
Since multi-family will have more units, you will be able to buy multiple units in one transaction. Compared to single-family homes, each one is a new search, acquisition, and purchase. With houses, you are dealing with many different structures, systems (roofs), etc., which can equate to more surprises. One roof change on SFR (Single Family Residence) could easily knock out your profits for a year or more. Being able to purchase more units in one transaction allows you to scale up quickly. And spreading your expenses across multiple units will typically bring down your costs per unit. Another thing to consider is owning one property compared to 5 different properties it would make it much easier to liquidate if needed.
The Secret to Financing
Financing for one to four units is based on you and your personal income, assets, and liabilities. Five or more units makes it a commercial loan that is more based on the investment property. It is more analyzed as a business; therefore, a lot less personal paperwork is involved. We are also able to get loans that can offer interest-only for 24-36 months.
Get the Best Pricing by Investing in More Units
Buying more units will take you to a higher price point; therefore, many people get started by investing in SFR’s as that’s what they can afford. What we like about what we do is it allows our investors to invest in the apartment world without having to buy a whole building and have it be completely passive. We feel like it’s a win-win situation for everyone, especially once you consider all the tax benefits that we can unlock with doing a cost segregation analysis, which you would not typically do with a low unit count.
Consider the Impact of Vacancies on Your Income
If you have a vacancy on an SFR, you are 100% vacant. If you have ten vacancies in a 100-unit building, you are at only 10% vacancy. Therefore, in one situation, you are making no income compared to 90% of your income. There is a lot more room for vacancy the higher the unit count. If your SFR stays vacant for multiple months, there’s a strong chance you could be getting into the red for that year.
To conclude, though there are various ways to make money off rentals, we feel buying apartments is the best route to pursue cash flow. The ability to scale up, creatively finance, and not deal with high vacancy levels is what sets it apart for us. Single-family homes can cash flow, but the number of homes you would need to buy to set up solid passive income would be much more strenuous than buying apartments. This is why we have picked this route, and we invite you all to come join us!