Typically this discussion will take you down the road of buying Apartment Buildings versus Single Family Homes ... but I want to take a look at whether it's better to buy a single family home (SFH) or a home with multiple units in it (MFH).
So for this article, a SFH is defined as a property (can be a detached house, condo, townhouse, rowhouse, etc.) that has only 1 unit and thus only 1 family living in it. A MFH, for the purposes of this article, is defined as any property that has more than 1 unit/family living in it. Thus, it could be a house with a basement suite (2 units), a duplex (2 units), a triplex (3 units), etc.
For this example, we are using 2 Single Family Homes I purchased and comparing them to 1 MFH (a side by side duplex) I purchased. The reason we are comparing 2 SFH with 1 MFH is based on purchasing power. Basically, if you have X number of dollars to spend, you want to be able to compare based on that amount - rather than looking at for example $400,000 for a MFH vs.
$300,000 for a SFH.Here's the numbers in our real life case study on buying single family homes vs multifamily homes:
Bought 2 SFH properties:
1 - $74,500, rent was $720 per month
2 - $72,500, rent was $500 per month
- Total cost: $147,000, total rent was $1,220 per month
- Total expenses on these two was $1,200 per month
- Net cashflow of an exciting $20 per month!!
Today's value: Total of $330,000
Total rent today: Total of $1,348
Total expenses: Total of $1,400 per month, currently a net loss of $52 per month
Bought 1 MFH (side by side Duplex)
1 - $152,900, rent was $1,600 per month
- Total expenses were $1,300 per month
- Net cashflow of $300 per month!!!
Today's value: $350,000
Today's rent: $2,450
Total expenses: $1,900 (after refinancing)
Net cashflow of $550 per month!!
Which one do you think is the better investment? Well, in most cases I would think our savvy readers would think the MFH property is the better investment. And, for some of you it would be. It is giving us excellent cashflow that is for certain!
There are a few reasons why I am not so sure the MFH is the clear winner. Let me explain why...
- The 2 SFH's are in a prime development area, thus the LAND value continues to go up and up and up! So, the opportunity for good appreciation is stronger in that area than where the MFH is located.
- The 2 SFH's are on freehold land vs. the MFH is in a strata community. Thus, there tend to be more restrictions on what you can and can't do in a strata community than when you own the land on freehold title.
- We have had a total of 4 different tenants across BOTH SFH's in over 5 years! 1 of our tenants has not changed since we bought it and the other property has had 3 different families over 5 years. Meanwhile our MFH, while a pretty nice duplex, has had over 8 turnovers in the same timeframe. Higher turnover means higher placement costs, higher maintenance costs, and more stress!
So, the reason I share this example with you is to give you a taste that there often is NO CLEAR WINNER between SFH and MFH's when it comes to real estate investing. What matters isn't which is a better investment, it's what is a better investment for YOUR time, energy and resources.
Before deciding multi family homes are the better investment because they have the potential for better cashflow, first ask yourself these questions:
- Who will be responding to any potential tenant squabbles (me or a Professional Property Manager)?
- Does the MFH have legal or illegal suites? If they're illegal (which many are), just prepare yourself that if a noisy neighbour complains, that you may have to work with the City to either legalize the suite (can be costly) or decommission it. Either way, this may eat up a chunk of your time, energy, and money. So, be sure you don't mind doing this.
- Who's going to be paying all the heat, hydro, and electricity bills? If each suite isn't metered, you'll want to determine if you can get your tenants to pay their portion or you'll have to include it in the rent.
What about before deciding investing in single family homes is the way to go. Ask yourself:
- Can I carry the costs (mortgage, electricity, taxes, insurance, etc.) when there are any vacancy's?
- Do I want to pay a Property Manager to manage just 1 tenant or can I handle the odd late night repair phone call and some minor maintenance issues?
- Do I strive for more liquidity in my investments (the ability to sell faster)?
- Do I want the potential for greater appreciation or just monthly cashflow?
Rather than listen to what anyone else thinks is the better investment get out there and decide for yourself. In all likelihood, whichever one you think fits your skills, personality, and aptitude, the better investment it will be for you. But, you'll never know until you get started ... so go ahead and get started!
Buying Single Family Homes Versus Multi-Family Homes - A Case Study