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If you’ve thought about investing in real estate you can consider the pros and cons of houses versus apartment buildings, or another category altogether. This article will be limited to houses versus apartment buildings. In a future article I will address condos and commercial properties.
It seems like many people who consider investing in real estate consider keeping a house they were living in and rent it out when they move up or away. Or they think about buying another house to rent out as their first real estate investment.
Upfront you need to know I have a bias: I do not favor investing in houses. My preference is apartment buildings.
Here are some of the pros and cons of single-family houses:
Pros:
- It is real estate, and if it’s in a nice neighborhood it will grow in value over time.
- In some parts of the United States, the property tax rate on a house will be lower than other types of commercial properties
- Your tenants, if properly screened, take care of the house as if it was their own, reducing maintenance costs
- Your tenants generally stay for a long time reducing turn over costs
Cons:
- When a tenant moves out you still have 100% of your expenses, but you have lost 100% of your income, and you have to spend additional money to get it rent-ready.
- The return on equity is usually lower. It costs more to acquire when compared to the cost of individual units in an apartment building.
- If you have several houses, you have several yards, roofs, electrical and plumbing systems which can require more maintenance than a single apartment building
- When it comes time to sell; the price is based on how it compares to other houses, the floor plan, the colors you’ve chosen, the neighborhood, and other emotional factors.
Here are some of the pros and cons of apartment buildings.
For my comparison I will use buildings that have 15 units or less, which is what my wife and I own. The investments we have in much larger properties are held with others and have professional management.
Pros:
- In California, buildings with 15 or fewer units do not require onsite management. You can manage it personally when the property is near you.
- Your tenants, when properly screened, will take care of the property and let you know if items need repair.
- If you treat your tenants well they will stay for a long time. Even in studio apartments the average for us is three years, and I’ve had one who stayed for 17 years.
- In nice neighborhoods the buildings have a higher per-unit sale price, and the price is also based on a Gross Rent Multiplier (GRM), not other emotional factors.
- When your sale price is based on the GRM, when you increase the rents you automatically increase the value/sale price of the building, versus emotional factors.
- With 15 units you will have only one roof to deal with, one plumbing system, one electrical system, one gardener, and one location to check out.
- Even with a four-unit property, if a tenant moves out you still have 75% of your rental income to cover expenses.
- Your loan on a four-unit is structured the same as a single-family house; you can get 30-year financing.
- When you have 5 or more units the loan is in the commercial category and is based on the property more than on your credit.
- You can choose a loan length of 3-10 years.
- If you personally do the management, you will have less of a time commitment per unit in an apartment building than with a single-family house. I average 3 hours per week for 26 units or about 7 minutes per week per unit. My guess is that I could spend 1 hour per week for a single-family house, therefore 26 houses could take up 26 hours per week. If it were only 30 minutes per house per week it would still be 13 hours versus 3 hours. This year the high was 7 hours in one week, while the low is zero hours.
- If you join an apartment association you will receive updated educational material through their magazine and be able to network with other owners for referrals and best practice ideas.
Cons:
- If you have to replace the plumbing, electrical, or a commercial HVAC system for an apartment building it would be more than a single-family house, but less per unit.
- Depending on the state in the United States the property taxes could be higher per square foot than for a single-family house.
In the next article I will address condominiums, townhouses, and commercial properties.
If you have any specific questions, feel free to set up a time to chat using the contact link at www.WealthOnAnyIncome.com
To Your Prosperity,
Rennie
