My first thought when I started investing was that there is more management hassle with two small units than one big unit. On the other hand, with two small units (or a duplex), if one tenant does not pay or vacates, you still have some rent coming in. You have to decide what is more important for you, and that will come down to whether you are short or time or on money.
I like to maximize my cap rate or rental yield. I find that high end properties usually generate less cash flow than mid range or low end properties. This is because there is a much smaller pool of renters able to make high payments. Those people are more readily able to buy instead of rent. And buyers are able to buy properties that are out of the reach (in terms of monthly cost) of most renters. Most high end homes will never cash-flow. With rental income properties, you can ask the seller for three years of schedule E’s and get accurate historical numbers. Seller’s will overstate income and understate expenses on a listing, but will not do so when reporting to the IRS. When reporting to the IRS, an owner will want to maximize deductions and will not overstate income. The schedule E numbers will have vacancies built in, so you don’t need to guess about vacancy rates and subtract a number from gross rents to account for vacancies. Such historical income and expense numbers do not exist for single family house that were not rented out to tenants.
I prefer middle of the road properties, in terms of price. They are easiest to rent and to resell. And I prefer average age and condition, not newer construction. Tenants do not have the same standards as owners. If you give a new property to a tenant, you will almost always be disappointed with its condition after the tenant moves out.
With the low end properties, management ends up being a hassle. Repairs are a higher expense. Criminals may break in and steal tenants’ property or may harm your tenants, causing you liability, or may vandalize your building. By low end, I am talking about properties in trailer parks and high crime neighborhoods, not blue collar areas.
I should point out that I am talking about the building location, not quality of tenants. You can screen tenants but you can’t easily move a building. And I should point out that not all tenants on welfare are bad. Some are legitimately disabled or unable to work. With section 8 subsidized properties, in which the government directly pays you rent, you do steadily receive rent without late payments or excuses. But regardless of the quality of the tenant, a property in a bad area will cause more headaches and liability.
I’ve heard people say that in the middle of the day, you should look at the parking lot of a complex you are considering buying. If there are a lot of cars, that means that people probably aren’t at work (unless they work the night shift). I’ve also heard people say you should also look at the roofs of a neighborhood as an indicator of whether an area is a good, well maintained, area or not.
I own single family units, duplexes, and multifamily. I originally expected that there would be economies of scale with the multifamily properties, as there is only one roof to replace, only one driveway to plow, etc. In fact, I now prefer single family houses. I have discovered that vacancy rates are lowest with single family properties. They are second lowest with duplexes, third lowest with fourplexes, and highest in large complexes unless you have a lot of amenities. My rate of return is better with single family homes, and they are easier to resell. When reselling a single family home, I can sell to owner occupants who are not looking at financial statements or to investors. With a duplex, my market is limited only to investors. If there has been a recent stock market crash or real estate crash, investors lose confidence and stop buying. But owner occupants always need a place to live. Also, with the 4+ unit buildings, you are required to use commercial financing, which has a higher cost than conventional financing.
A duplex with each side paying $600 per month rent generates less cash flow for me than a single family house of similar square footage with rents of $1000 because, in the single family house, I can easily make the tenant responsible for all utilities, yard care, everything, and the vacancy rate is lower.
So the answer to the question depends on the price and locations of the large house or two small houses. Two small houses are a better choice if you are looking at two mid range properties versus one high end property. One large house is a better choice if the large house is in a mid range house in a good area and the two small houses are in bad areas.
For any purchase, you want to put down the lowest amount of cash you can, to maximize your leverage and have money left over for other deals, as long as this does not horribly affect your interest rate.