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Rental Houses or Apartments, Which is a Better Investment?

Investors can make a good solid case for buying rental houses or apartments. While both single family residences and multi-family properties can made good investments, we want to look at different investment scenarios so that you as the investor can know which investment type (houses or apartments) will meet your investment goals.

Why are Rental Houses a Good Investment?

There are a few primary reasons why investors look to buy single family residences. Consider these reasons:

  • “Starter” houses are cheaper than apartment buildings.
  • It can be easier to obtain financing on a house.
  • Rental houses will appeal to both investors and owner/buyers when sold.
  • Single family residences may appear to be easier to maintain.

Single family homes are a relatively easy way to own rental properties. The purchase price is cheaper and thus it is easier to save a down payment for these properties. The rentals can be sold to owner occupants either directly or on a lease-to-own basis which makes the easily liquidation appealing to new investors.

Why are Apartment Buildings a Good Investment?

While most investors may start out with cheaper single family homes, most will eventually graduate up to multifamily properties. What are the main reasons for this shift?

  • Multi-family properties will cost less per unit than single family homes.
  • Apartment buildings generate a higher cash flow per property.
  • Usually per unit maintenance expenses are much less than rental homes.
  • Capitalization rates are usually higher for apartment buildings.

Most conventional lenders will have a cap on the number of residential loans that any one person can hold at a time. Even if an investor finds the perfect cash flowing investment, if they have reached the loan cap, conventional mortgages are no longer an option. Consolidating several single family homes into one multi-family investment frees up the potential for additional mortgages.

Investors who have dealt with the single family rental market will eventually see that maintaining an apartment building can actually be easier. Consider some of the reasons why this is the case:

  • One apartment building with 24 units = 1 roof, 1 yard, 4 exterior walls, 1 parking area.
  • 24 Single family houses = 24 roofs, 24 yards, 24 exterior walls, 24 parking areas.

When you look at the investment options this way, can you see why the per unit maintenance costs would be cut dramatically by buying apartment buildings rather than the same number of rental houses? This is why apartment building investors reap a higher cash flow.

There is another appealing reason. Once you get over 5 units per property, the mortgage will be classified as a commercial loan. While interest rates and closing costs are slightly higher than residential mortgages, lenders are more concerned with the property’s profitability rather than on the owner’s personal financial history. Owning several positively cash flowing apartment buildings will make it easier to obtain additional commercial financing.

Houses or Apartments?

So, which is a better investment: houses or apartments? Well, that depends on you as the investor and your long-term investment plan. It also will be based on the amount of down payment that you can rustle up. The higher the down payment, the greater number of units you can purchase within a single property. This might mean that you will want to consider finding an investment partner.

If you have been micro-managing a handful of rental houses for some time, maybe now is the time to widen out your investing portfolio into multi-family apartment buildings. If you can locate a profitable investment, you will find that managing apartments can be easier and much more profitable.

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