Investment Comparison Between Apartment Buildings and Single Family Homes
A lot of the investors that I work with have some experience investing in single family homes but they want to know more about some of the advantages and disadvantages of investing in apartment buildings. The following lists are not meant to be exhaustive lists detailing every single advantage and disadvantage of investing apartment building and single family homes.
The lists are just meant to reflect some of my own observations on each type of investment property. Also, these lists assume that the investor is buying the apartment building or single family home investment for the purposes of holding over an extended period of time. The lists don’t consider other investment techniques such as flipping.
Advantages of Apartment Building Investments
- Lower cost per unit than single family homes.
- Greater cash-on-cash return. Traditionally, apartment buildings offer a greater return than single family homes.
- Foreclosures! All of the families who have been displaced because of foreclosure are going to have to live somewhere! And most likely they will live in apartments.
- You start profiting instantly. You benefit from positive cash flows from day one. And you can live off that income, so you don’ have to go to a job everyday.
- You can afford a property manager. You can actually cut down your property management costs and headaches by hiring a company that specializes in apartment building management. Never talk to a tenant again
- It is easier to get seller financing. Apartment building owners are generally more financially astute and are more willing to help you finance the property. It is even possible to get 100% financing.
- Apartment buildings can appreciate faster than houses. Strong demand in metro areas with limited apartment vacancies can cause prices to soar.
- Pay HALF the taxes you now pay. Standard tax rates of 30-50% don’t apply. You will be able to pay the capital gains rate of 15% by buying and holding.
Advantages of Single Family Home Investments
- Lower start up costs. The down payment on an investment house can be extremely low. Some investors are able to obtain cash back at closing.
- Financing for single family homes is readily available.
- The acquisition costs are less then an apartment building. Generally, you do not have to perform an environmental survey or pay expensive out of pocket fees prior to closing.
- 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.
- There is the potential to buy single family investment homes from desperate sellers thereby acquiring the investment at below market value.
Disadvantages of Apartment Building Investments
- High start up costs.
- Larger tenant turnover.
- High maintenance and management costs.
- Generally you will have to put down a 20% down payment.
- 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 effect your investment returns.
- High out of pocket fees and expenses are required when qualifying you apartment investment deal with a commercial lender.
Disadvantages of Single Family Home Investments
- The cost per unit is usually higher.
- If you lose your tenant then your cash flow goes to zero.
- Prices in the residential market can fluctuate wildly.
- You may be required to belong to a Home Owners Association.
- Because of the higher unit cost, cash flow is lower.
- Maintenance costs can be excessivEach unit has its own roof.
- The taxes and insurance, per unit, can be much higher.
- The replacement value is higher.
Article Resource: Bigger Pockets