November 28, 2009

Which Makes Better Rentals: Single Family Homes or Plexes?

If you are planning to buy real estate as an investment then you can go two major ways with residential property. You can buy a single family home or you can buy a plex. A plex is a duplex, tri-plex, 4-plex or other larger multi-family property. There are pros and cons to doing single or multi family properties.

Reasons that Plexes are better

Rent Income is diversified - If you have a vacancy in a mult-family unit then you aren't losing 100% of your rent over it. If you own a 4-plex and there is a vacancy in one unit then you're still getting 75% of your rent from the other 3 units. Its not very likely you'll have multiple vacancies at the same time very often. This helps smooth out your cash flow better.

Generally better returns - It usually easier to make positive cash flow with a plex than a single family unit. If you look at rent / property cost, around here it seems I can get only 4-5% on a single family but could get 6-7% on a duplex. The profitability is a bit easier with mult-units.

Easier to watch over - With a mult-family unit you have easier access and better reason to be at the unit checking up on things. With a single family unit you have only one tenant. To go to the rental you really need an excuse or reason to be there. If you show up all the time it may be irritating to the renters and to gain entry you need permission or have to give them notice. Plus with a multi-unit the tenants will tend to watch over one another. If a tenant is causing problems then another tenant will likely complain to you and you'll find out much quicker than you might with a single family unit.

Reasons single family are better

Fewer tenants = less work - This is probably the biggest one. With more tenants you will generally have to do more work and have more potential hassle. A single family unit only has 1 tenant but a plex has more tenants.

More bills with multi units - With a single family unit you can usually have the tenant pay most if not all the utilities like water, garbage, sewer, etc. You'll often endup paying water and garbage on a plex and maybe some other bills. The landlord is often stuck paying some utilities since the service is not split up between the renters.

Easier financing, insurance or regulations on single family- It can be harder to get financing on a mult-family unit than on a single family home. Insurance companies may jack up the rates on multi-family units since you have more risk due to more occupants. Zoning rules may be more of a hassle or cost you more money in various ways with a multi-unit property.

Easier resale - A single family home has better demand and resale. There are plenty of people out there that want a home to live in but much fewer people who want to own a rental.

Potentially less upkeep - You can often have a tenant in a single family unit handle basic upkeep of the unit like mowing the lawn or raking leaves.

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