Investing in multi-family vs single family rental homes

Why? Everyone needs a home but not everyone needs business space.

This is an understatement in Uganda’s case because of the huge housing deficit.  

According to Habitat for Humanity, Uganda’s housing deficit stands at 2.4 million housing units. Of these, 210,000 units are lacking in urban areas and 1.395 million units in rural areas. An estimated 900,000 units are substandard and in need of replacement or upgrading.

You simply cannot go wrong with rental homes. There is demand for all classes of rental homes; from studio apartments worth Shs100,000 a month to upscale condos worth Shs7m a month. And everything in between. This is why rental homes are a popular investment option. 

When prospective investors think of erecting rental properties, they are always faced with two main options. Multi-family properties or single family rentals. 

A multifamily property is any residential property that contains more than one housing unit. The houses can be detached or semi detached or in a flat of apartments. A single family home is just that; a stand alone house on a plot of land. 

On the face of it, the main factors for choosing between the two options are usually plot size and cost of construction. However, any plot can take more than one home with the right architectural planning and a phased construction would easily solve the cost issue. So why fill your plot with one rental house when you could build two or more? 

The two options have pros and cons each and we will venture to explore them. 

Pros of single family rental
While it seems counterintuitive to fill your plot with a large single family rental home instead of packing it with several, some investors would rather have a single family rental because of management considerations. 

“While several rental units in the same space might promise more income, the challenges that come with managing several tenants in the same enclosed space negate the financial advantages,” says Peter Mawanda, a property trader in Budo. 

He says that because most investments in rental housing are small scale, most people prefer to manage this business themselves. 

“And when given a choice, most people would rather have one tenant rather than have six. It is easier to manage the repairs, the rent collections, sanitation (where necessary) and even evictions in a gate with one family than in a fence with multiple families,” he says. 

And because such investors manage their property themselves, they would rather deal with one tenant rather than dealing with six or seven tenants in one gate.

Again, we are talking small scale rental investments. 

Experts say that multiple-family rentals work better if they are put under property management company. Management companies deal directly with tenants. They save you time and worry because they take over the marketing for your rentals, collecting rent, handling maintenance and repair issues, responding to tenant complaints, and even pursuing evictions. 

However, the regular investor cannot afford a property management company worth the salt. That is one of the major reasons some people would rather build single-family rentals. A stand-alone bungalow in its own gate occupied by only one family. 

“This is one of the reasons that people give in preferring a single-family rental as opposed to several semi-detached rentals. The other is that most people do not have the luxury of staying nearby their investment to keep a keen eye on the property and the needs of the tenants. The more tenants you have in one gate, the more demands on the landlord,” Peter says.

Pros of a multi-family rentals
When it comes down to business, multiple-family rentals (semi-detached) are the way to go, according to Alex Muhwezi, a property owner and broker in Kasangati. 

“If there is anyone who prefers a single-family rental over several smaller units, that person is either ill-advised or a bad businessman. If you do not get a well-to-do refugee (read South Sudanese) to live in that house, you will mostly get frustrated looking for the right tenant. Very few Ugandans in this worsening economy want to pay two million shillings a month in rent. I have seen cases where someone offers Shs400,000 for a three-bedroom house, whose starting price is Shs1.5m,” Muhwezi says. 

Muhwezi says that the more units one can fit in a plot the better. “There are more people looking for the cheapest possible housing than those looking for luxury. Tenants prefer the cheapest possible housing. Several single rooms on one plot (up to 12 if there is no parking space left) is the best use of your money. 

“A single room with a toilet and bathroom ranges between Shs150,000 and Shs200,000. If you fit twelve of them in your plot, you are assured of a constant Shs1.8m in rent income on the low side. Most standalone houses will not give you that much,” he says.

Cissy Namaganda of Cinam Investments says that multiple units in one space give better returns. 

“It is possible to earn three times more income from four small units than from one big bungalow. It is possible to fit four two-roomed rentals in a 50ft by 100ft and leave enough parking space for four cars. So why would you build one instead of four?” she wonders and adds, “Maybe if the cost of construction is big factor.”

Cost of building
Adam Mugisha lives in Kakiri on Hoima road. When he finally got a well-paying job, the first thing he did was to get a bank loan just so he could invest in the housing sector. 

He says, “My plan was to build four rental units in my plot. But it did not take long for me to learn that I would not afford the cost of building the four semi-detached units. So I built a miniature bungalow at the edge of the plot, leaving room for the rest of the units, for when I could afford to construct them. I think most people end up building a stand-alone rental house because of cost,” he says. 

According to Fred Kangwangye, a civil engineer, the cost of building three two-bedroom units is double the cost of building an average-sized bungalow.

“A bungalow built with low-cost materials of good quality costs between Shs80-100m. In comparison, the cost of semi-detached two-bedroom units that are small enough to fit into a 50ft by 100ft costs between Shs180-Shs200m,” he says. 

The engineer adds that while you can build four or five two-bedroom units on 50ft by 100ft by reducing the size of the rooms, you can only be allowed to build a maximum of three such units in urban councils. All rooms must be measuring three meters and above on the smallest dimension or it will not be approved,” Kangwagye says. 

“Some people cheat by labeling smaller rooms as stores only to use them as bedrooms later, but that is another story,” he adds. 

If the cost of building multiple units on your plot is standing in the way, the trick, it appears, is to build the units in a phased manner. 

Experts tend to agreed that multiple units bring better returns than a single house. Except in special circumstances.

When a single family unit is best
Peter Byamugisha a property trader in Gayaza says there is a place for building a standalone bungalow for rent. 

“For anyone that finds himself in the possession of a plot of land in a very developed suburb, it is best that you build a single bungalow on it. That is especially if you do not have enough money for anything costlier, like a flat of apartments or something like that,” he says.

“Some companies and Non-Governmental Orginisations usually like bungalows in quite neighbuorhoods away from the chaos of down town. And they pay top dollar for it. Why build small residential rentals when you can make much more money from renting your bungalow to a company as a business premise?” he adds.

When all is considered, multiple units on the same plot make more commercial sense than a single bungalow. 

If you are worried about managing so many tenants in your property, you can either hand it over to a property managing company or move into one of the units.

This way, you will be able to supervise your business better.

A standalone house is cheaper to build, yes, but it makes much less commercial sense on the most part. 

Economical
"A single room with a toilet and bathroom ranges between Shs150,000 and Shs200,000. If you fit twelve of them in your plot, you are assured of a constant Shs1.8m in rent income on the low side. Most standalone houses will not give you that much ,” says Alex Muhwezi, landlord.

Clients
Some companies and Non-Governmental Orginisations (NGOs) usually like bungalows in quiet neighbuorhoods away from the chaos of down town.

And they pay top dollar for it. Why build small residential rentals when you can make much more money from renting your bungalow to a company as business premises. 

When all is considered, multiple units on the same plot make more commercial sense than a single bungalow.