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Investment

Thinking about investing in real estate? It’s a great way to build wealth, but like any investment, it has risks and requires an upfront down payment.

To be successful, you need to figure out two things: what kind of property aligns with your goals, and how to pay for it.

Two popular options are single-family homes and multifamily buildings. They each have pros and cons, so let’s explore which might be a better fit for you.

What Is Single-Family Investment?

Single-family homes are a great place to start! They’re typically more affordable than multifamily buildings, making them easier to enter the market. Plus, managing a single house is simpler than dealing with multiple units. They’re also a good investment for investors who want to earn rent while the property value itself tends to increase over time.

Pros and Cons of Single-Family Investment

Pros:

  • Easier to buy: Lower down payments and more financing options make them a good entry point for new investors.
  • More manageable: Handling a single property is easier than managing multiple units.
  • Geographic spread: You can invest in different areas to diversify your portfolio.
  • Easier to sell: Single-family homes are generally easier to sell and tend to move faster on the market compared to multifamily properties.

Cons:

  • Lower income: You’ll get rent from just one tenant, limiting your overall cash flow.
  • Slower growth: Expanding your portfolio requires buying more properties, increasing costs.
  • Finding help: It can be tough (and expensive) to find reliable contractors and property managers for single rentals.

Cash Flow Example for Single-Family Home

Let’s say you purchase a single-family home for $250,000 with a 20% down payment ($50,000). Assuming an average monthly rent of $1,500, here are some estimated figures:

  • Monthly rent: $1,500
  • Mortgage payment (P&I): $1,000
  • Property taxes and insurance: $250
  • Maintenance and management: $150

Net monthly cash flow: $100

Net annual cash flow: $1,200

What Is Multifamily Investment?

Multifamily properties could be a good option. These are buildings with several separate units that are rented out to individual tenants. This means you, the investor, collect regular income each month.

Pros and Cons of Multifamily Investment

Pros:

  • Stronger cash flow: Rental income from multiple units can significantly boost your profits.
  • Economies of scale: Managing a large building can be more efficient than overseeing several single homes.
  • Tax advantages: Multifamily properties offer tax benefits like depreciation and deferral of capital gains taxes.
  • Vacancy buffer: A vacant unit has less impact on your overall income compared to a single-family home.

Cons:

  • Higher investment: Multifamily properties require a larger upfront investment, making them less accessible to new investors.
  • Greater risk: Unexpected expenses or market changes can have a bigger impact on your investment.

Cash Flow Example for Multifamily Property

Consider purchasing a 4-unit multifamily property for $600,000 with a 20% down payment ($120,000). Assuming each unit rents for $1,200 per month, here are some estimated figures:

  • Monthly rent (total): $4,800
  • Mortgage payment (P&I): $2,500
  • Property taxes and insurance: $600
  • Maintenance and management: $500

Net monthly cash flow: $1,200

Net annual cash flow: $14,400

Conclusion

Single-family rentals are a good choice for beginners who prioritize ease of management and geographic diversification. However, the potential for higher income makes multifamily properties more attractive to experienced investors who can handle the increased complexity.

If you’re considering investing in property, reach out to DealWorthIt. Our AI-powered real estate underwriting software streamlines this process by:

  • Data collection: Forget wasting time on manual data entry. DealWorthIt gathers accurate real-time property data, saving you time and effort.
  • Quick Underwriting: With DealWorthIt software, you can underwrite properties in 60 seconds, allowing you to make informed decisions.
  • Multiple scenario analysis: Underwriting a property involves considering different possibilities. DealWorthIt allows you to run various scenarios to assess potential risks and rewards, giving you a clearer picture of the investment.
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