A single family home is a standalone property on its own lot. Investing in a single family home is basically investing in a house or a condo to rent it to a single tenant. One of the simplest definitions of single family rental property investing is getting paid for what you own, rather than just paying to own it. It has a few pros and cons attached to it but it depends on your expectations from the property.
Usually, people tend to buy a property in a low-budget or affordable locality and revamp it to attract new tenants. Investing in single family rental homes gives the investors the liberty to determine their profits in many ways. Some of the advantages of buying single family rental properties are huge tax write-offs, a passive rental income, and a long-term capital appreciation of properties.
Single-family rental homes are easy to buy and hold for new real estate investors. Investing in them can deliver immediate returns, plus the long-term appreciation of the asset. It is a great way to save for your retirement as this type of real estate investment becomes a good source of regular passive income. The discrepancy between the number of renters and landlords in the United States is increasing every day.
Investors find real estate investing viable for many reasons. Unlike stocks, real estate is a tangible asset. Investors choose real estate because they can touch and feel the asset, and also watch it appreciate over time. They see single family rental homes as a way to improve monthly cash flow and diversify their investments.
Single-Family Homes vs. Multi-Family Properties: Which Investment is Better?
Both single and multi-family rental homes are good investments. They definitely lead to a positive cash flow, but there are differences between both investments. Single-family rental homes are affordable and have higher appreciation. You can get suitable tenants and maximum exit strategies with single family rental property investment.
On the other hand, multi-family rental properties give you high rent, maximum vacancies, and rent depends on the landlord as it is not subject to economic factors. So let’s begin by talking about the advantages of investing in multifamily properties.
Single-Family vs. Multi-Family: The Scalability Factor
The first thing that investors think about when it comes to multi-unit or multi-family properties, those that are five units and above, which could be 50, 500, or more, is that you can scale faster. And there is some truth to that. And this is the big thing that Grant Cardone talks about. I know Grant he’s been on my show. I’ve been on his ask the pros show a couple of years ago.
You know, the whole thing about scaling faster is that you can complete one transaction and end up with, let’s say 20, 30, 50 units in one purchase under one roof typically, but it could be multiple properties. But the idea is that you have fewer closing costs. Although the closing costs are significantly higher and a little more complex when you’re purchasing multi-unit properties or multi-family properties of that scale.
You’re definitely going to be paying a lot more in terms of the appraisals, the inspections, the complexities of it, etc, but it’s still one transaction. And so if you’re getting one loan for that purchase, you essentially have fewer total transactions. So there’s some simplicity in that, but there’s greater complexity in the purchase or the transaction itself, but you can scale faster.
Now, this is assuming everything else is equal, meaning that you are starting with the same investment capital that could be, you know, 200, 500,000, a million dollars as your down payment versus using that same amount of capital to purchase single-family homes or duplexes or fourplexes, but something in the residential space.
So with the same amount of investment capital, it’s fewer transactions, but in terms of the number of units, you can do it either way, but that is the general argument. And sometimes the number one advantage of going the multifamily route over single families or duplexes and fourplexes is that you can scale quickly. And so there is truth in that, just understand that it’s not what you are hearing at face value, meaning that you can scale faster period, full stop.
End of story. It’s not exactly like that. You have to understand the other complexities and dynamics that are involved with the purchase of a multi-family property. And also realize that the lending side of this is a little bit different. They’re going to take a much closer look at you, but they’re certainly going to scrutinize the property.
That's because they’re typically qualifying the property just as much, if not more than you personally. After all, they’re looking at the property as a business and they want to make sure that the revenue or the cash flow from that property is more than enough. A higher enough metric that it can service the debt, something they call DSCR or debt service coverage ratio, which is often about 1:2. So that’s the first thing you can scale quickly.
Economies of Scale With Multi-Family Properties
The second benefit of the multi-family property has to do with economics, what economists or professional investors refer to as economies of scale. So when you have more units or more apartments under one roof, you are essentially sharing in the cost of upgrades to the common areas or the mechanicals such as the boiler hot water tank or roof.
And that cost is spread across all, whatever 20 units, 30, 50 units in that building. So it might be a very expensive repair, a 20, $30,000 roof repair, but you’re dividing that 20 or $30,000 roof repair amongst, let’s say 20 units in the building. So you have the economies of scale. You have mechanicals and items that are shared as common or common areas amongst all the residents and the units in the building. So that reduces the overall cost on a per-unit basis.
That doesn’t necessarily mean it’s cheaper than the equivalent repair in a single family home. It actually could be a lot more expensive, but the thought there is that it probably will last longer as well, being in a commercial building. Although that's not always true, what you often have are one item, one repair, one location, maintenance issues, and inspections are all done at that same place.
People are not being dispatched to different locations because you have different properties in different locations around a market. Property management may be completely localized. You may have an onsite property manager. If the building is large enough, usually that’s, you know, 50 to a hundred units.
And above is when you start to have resident managers. If you have a property management company and they’re looking after, let’s say 20 units at a building versus 20 single-family homes or duplexes peppered around the city, it adds some simplicity, but I would argue that it doesn’t matter. At the end of the day, if you’re working with a property management company that’s managing multiple properties in different locations within a market, that’s what they’re doing for many clients, that’s just built into their business model.
And that’s part of what they do, where there is saving with apartment complexes. And multi-family units are often in the management fees with multi-family properties. It’s not uncommon to have management fees in the 4 or 5, 6, 7% range of that monthly gross rental income that’s collected. Whereas with single-family residences, the street rate, as I say in air quotes is 10%.
But the reality is, is that often, and especially with the property management companies that we work with, uh, in many markets and often that rate is often 8%, sometimes nine and even sometimes 7%. So I don’t know what the average is, but I would guess that the average is probably around 8% as far as the management fee. And especially if you have more than one property with a property management company. So that’s also a negotiable item.
So keep that in mind, but there is a saving because of, again, the economies of scale with multi-family properties, especially as they become much larger, meaning a hundred units and above, it’s not uncommon to have a management fee of around four or 5% on the low end 6, 7% on the higher end. And you know, that doesn’t mean a lot if you have a small number of units, but it does add up if you are talking about large-scale properties.
Higher Monthly Cash-Flows in Multi-Family vs Single-Family Homes
Another advantage of multifamily properties has to do with supposedly higher monthly cash flows. Again, this is an arguable point because it assumes that all else is equal, but it doesn’t necessarily mean that you have higher cash flow. The basis of this argument by a lot of investors is that if you have, let’s say hypothetically, a 10 unit apartment complex, and you have two vacancies, you’re essentially 20% vacant or 80% occupied. However, you want to look at it.
So if you have a vacancy, you don’t have essentially a hundred percent vacancy in that property compared to a single family home where you’re a hundred percent vacant. Well, that is true, but that’s also an unfair comparison. And I see this and I hear this all the time. What they fail to do is compare your portfolio, not just the property. Sure. If I have a single-family property, it’s one property compared to a 10 unit apartment complex, which is still one property.
If I have one vacancy in each of them, it’s the difference between a hundred percent vacant with a single-family home versus being 10% vacant on the 10 unit apartment complex. Those are true statements, but it’s really not taking the true situation into account because I may have 10 single-family homes in that market versus having one 10 unit apartment complex in that market.
And if I have one vacancy with the apartment complex and one vacancy in my portfolio of 10 single family homes, I have the same thing. I have one vacancy, one unit is empty on both ends. So I really have the same overall occupancy of 90%. So I think this is where people are not being completely truthful in the comparison between multifamily and single-family. So a vacancy is a vacancy and it doesn’t matter where it happens. You have to look at what is my total portfolio size, and then you can make a fair comparison.
Return on Investment in Single-Family Homes vs Multi-Family
Another thing to keep in mind is that the ROI, the return on investment on multi-family properties typically, and especially today, and has been this way for the last several years is actually not as attractive. In fact, it’s usually lower with multi-family properties than single-family homes. And one of the main reasons for that is that capitalization rates on multi-family properties have been compressed over the years.
They’re hard to find very few people are selling them and the people who are wanting to buy them are chasing after them with a lot of competition. And because of that, it’s driving the prices up pretty much across the board, all around the country. So multi-family properties have become more and more expensive because of the high and growing demand that a lot of apartment buyers and syndicators are chasing after. That’s also somewhat true with single-family homes, but more so with multi-family properties.
And the fact is, is there’s just far fewer of them. So as you get larger and scale larger, the number of units in the property, the fewer and fewer and fewer there are of them. So your monthly net cash flow is just one part of the equation when you’re factoring in what your total return on investment is, but keep in mind that your ROI, your cash on cash, and your rate of returns on multi-family properties are typically, and more than likely going to be lower with all else being equal, same market, same types of things.
Also, when you have larger multifamily properties, you have a common area inside and outside of the building, aside from the shared mechanics and the roof, and whatever else. And that usually means that you’re going to find more wear and tear on these common areas and these common mechanics that are in the property. So your upkeep and maintenance are probably going to be higher and that’s just an added cost. So you have to factor that into the equation as well.
Financing Single-Family Homes vs Multi-Family Properties
Now, when it comes to financing multi-family properties, lenders will take a more rigorous approval process in that financing. So they’re going to look at the property and they’re going to look at the trailing 12 and 24 months of cash flow of rental income of tax returns. They’re underwriting that property as if it was a business.
And they look at it as a business and social due, but it is sometimes, and maybe often easier to finance a loan for a $10 million apartment complex than it is to finance a single family home. And the main reason for that is really just the cash flow that comes from the property.
Again, a multifamily property is considered a business in the eyes of a lender, whereas a single-family home, even though it may be a rental property and you are truly getting a non-owner occupied loan for that property as if it was a rental property, which is, and will be the lender still looks at the larger multifamily property as a business.
And so they’re going to underwrite it from a cashflow perspective. That’s the most important thing to them. They’re going to look at you as well. They’re going to consider other things like the market value of that property, but they’re going to look at its financial performance because they care about the cash flow and its ability to service the debt, which is what they’re extending to you to make that purchase. So they think of it as a safer bet because of the cashflow. That’s really the bottom line for them figuratively.
And literally, the other thing too, is that multi-family properties, the value is based on the income that it generates, what is essentially known as the NOI or net operating income, which is all income minus all expenses, not including the debt service. And so that’s the number that they hyper-focus on to make sure that it meets their underwriting criteria to be able to service that loan ongoing basis, even with some vacancy.
So property values will change with multi-family properties based on the net operating income. Whereas single-family homes will be based on whatever the real market value is of that property based on the comparables in the area that can be determined from an appraisal. So that’s the thing about financing.
It can be easier, but keep in mind, these are larger loans with larger down payments and not necessarily as attractive terms as single-family, residential properties last but not least. There’s the concept of house hacking. If you are purchasing a multifamily property, whether it’s 10, 20 units, 30 units, 50 units, a hundred units, you can do this also with a duplex or four-plex by the way. But the concept of house hacking is that you live in one of the units and you rent out all the other units. And so this reduces minimizes or eliminates your housing costs for the month.
So your rent or mortgage payment is essentially covered by the operations of the business or that property. So this is a, you know, a nice concept and a great way to get started for many people who are just getting started and they have a minimal down payment, or they want to actually live and manage the property and learn from the experience.
Well, they’re purchasing, they’re usually first property, but sometimes it could be even their second or third as they start to stair-step and grow their portfolio and moving from one to another after two years or so because the tax benefits are there on the capital gains by living in a property for two years or more. So that can be a great benefit for those people who are looking to get started with their first property. And it’s easy to do with a two to four-unit property.
You can still call that a multi-family property, less likely to be able to do that with a large multi-family property, especially if you’re just getting started because you just don’t have the experience. And lenders will look at that. Okay. Now let’s take a look at the advantages of single-family rentals. So first and foremost, and this is going to be pretty obvious is that they are less expensive.
A single-family residential property can range from, let’s say, send the 80,000 on the low end to about 150 to 200,000 on the high end. And I’m just looking at the 20 or so markets that we’re in right now. So if you’re purchasing a single-family, residential property, there’s a wide range of prices because there’s a wide range of markets and neighborhoods within those markets. So the thing with multi-family properties is that a lot of things are going to cost more compared to a single-family home.
The other thing too is the down payments are going to be much smaller with single-family homes. So I always like to use a hundred thousand dollars property as an example, just because the numbers are easy to calculate, but with a conventional loan, you need 20% down for your down payment and that’s $20,000.
So that’s simple math, a hundred thousand dollars property, but when you compare that to a multiunit property or multi-family property, let’s say there are 20 units, and those are a hundred thousand dollars each. Well, now you got a $2 million property. However, your down payment is typically going to be 25 to 30% down.
That’s just what commercial lenders are going to require as far as that financing is concerned. So it’s a much larger amount, both in terms of price and percentages. It can add up pretty quickly because you’re looking at a minimum of 5% and probably 10% more in terms of percentages as far as the down payment.
So you got to keep that in mind, you’re looking at potentially $500,000 as a down payment on that $2 million property. So it’s not as easy to get started unless you have deep pockets. A lot of investible capital. Another thing to keep in mind is what the lenders require as a cash reserve to cover expenses or payments if needed, then they’d call these reserves.
And with a single-family home, it could be as little as two or three months’ worth of mortgage payments. Whereas with commercial property and a commercial loan, you will probably need six to as many as 12 months of reserves to qualify for that financing. So it’s considerably more in terms of what you need to have in the bank to show the lender after you’ve closed, that you’re able to be liquid enough to weather through any kind of storm that comes up.
Another thing with commercial real estate loans is that they typically have higher interest rates. And it’s often about two and a half percent higher plus or minus. It could be two to 3%, but about two and a half percent higher. On average, the terms are just less attractive. And there are also far fewer banks that you can choose from in order to get that type of loan.
And the main reason for that is because there’s a much smaller secondary market out there for them to take that mortgage and sell it off with conventional financing. Often these loans are sold right away like right after you closed, they’re already put into a package and sold onto the secondary market. So the lender can essentially reload their warehouse line or their capital to make the next mortgage loan. So the financing is a little more difficult and it’s not as widely available or abundant it’s out.
There there are many lenders out there, but certainly not as many as in the residential space last but not least in the process of getting financing, you are going to need to provide the last two years of financials and the rent rules for the property. As part of the qualification. You don’t need to do this with single family homes, because it really just comes down to your ability to qualify for that mortgage.
And I should mention that also with multifamily purchases, the lender is going to want to see that you have at least some prior property management experience, where again, with single family homes, you don’t need that. So the down payments are lower. The rates are lower, the financing terms are more attractive because you can get 30 year fixed rate loans. You can just lock it right in. You don’t need to show property management experience.
And often you’re not the one managing your own property. Anyway, you don’t need to show financials on the property like two years of tax returns or two years of rent rolls. So there are many advantages on the financing side.
Single-Family Homes Have Higher Liquidity
So when we say, you know, it’s less expensive to get started, it’s not just about the purchase price. It’s also about the down payment and the terms and the financing overall, by the way, appraisals are also much more expensive on commercial property. But again, you know, it goes back to the concept of economies of scale.
It’s much more expensive, but you’re also rolling out that appraisal across whatever 20 units, 30 units, or more the second advantage of single-family homes. And this is something I actually debated a couple of times with grant Cardone is the liquidity. There’s a greater ability to sell, resell, even purchase single-family homes.
It’s just a much, much larger, more liquid market real estate in general, as an asset class is not very liquid. It just, isn’t, it’s a little bit slow to buy and it’s potentially much slower to sell a property, but the smaller, the number of units right down to the single-family home, which is one unit that is the quickest property to sell in the residential space or the real estate space.
So it’s just an easier product to sell because they are less expensive and there’s a lower barrier to entry and you have a much wider pool of potential buyers. So it’s not just real estate investors that are buying and selling homes or real estate in general. But when it comes to single family homes, you have a large pool of wanting to be home buyers, people who want to buy and live in their own home, not to necessarily rent the property.
The Higher Demand For Single-Family Homes
So when you think about the buying pool, it’s the largest with single-family homes, and then it gets smaller and smaller as you go up to duplexes, triplexes, fourplexes, and on up. So obviously you can’t compare a 500 unit apartment complex and the size of the buying pool for that compared to a single family home, it’s a vast difference.
And this was my whole argument with rent. And he just, as of the belief that he can sell a 500 unit apartment building much faster than I can sell a single family home. And that debate didn’t go too far. I think I clearly made my point and I’m sure he knows I’m right, but whatever growing demand is also another advantage of single-family homes. And I’ve talked about this on and off on the podcast here for quite a long time, the fastest-growing segment of the single family space happens to be single family rentals.
It’s just incredibly high in demand. They are selling very quickly. And if you’re working with one of our investment counselors here, you will know that we do have inventory. There is a pipeline, but they do come and go and they go under contract fairly quickly, but that’s a common problem around the country. It’s not just unique to us. It’s just the way it is.
So single family rentals have been outpacing, even single family, home sales, but especially multi-family housing. So that’s one thing is just demand is strong. And it’s growing. According to the US Census, they estimated in a recent report that the number of single rentals in the US grew by 31% in the 10 years following the housing crisis of 2007. So that period of 2007 to 2016, had an increase in single family rentals by 31%, you compare that to the growth in the multi-family space, which is five units.
And above it grew by a healthy 14%, but you can see that single family rental demand grew by more than twice, as much as multifamily. So there’s strong demand and growing demand for single family homes, which is good for you from an appreciation perspective and a liquidity perspective, as well as the future demand for those properties in terms of rentals, sales, and price growth.
Also adding to this upside is that single family rentals traditionally have less tenant turnover compared to multi-family properties. And I’ll talk about this a little bit further here in a moment, but I just want to quickly say that another study that came out from the Urban Institute, put out a forecast showing that demand is very strong and continues to grow, especially from the millennial demographic, because they’re now entering that age when they want to start, not only buying their first home but having kids and the demand on new household formation is very strong and increasing.
So the desire for those single family homes is just increasing year-over-year. So that’s creating economic pressure and it’s just driving more demand for single family homes and rental homes. And that doesn’t mean demand is not there for multi-family properties. It’s just incredibly strong for the single-family from a diversification perspective.
Building a Diversified Portfolio With Single-Family Homes
Rental markets, as you know, are local dynamics. The economics are predominantly local. So what happens in one market is different than what happens in another market. So it’s easy or maybe easier to build a real estate portfolio. That’s geographically diversified because if you follow kind of my rule of thumb of three to five properties in three to five markets, you could quickly or relatively quickly build a portfolio of three, five houses, or even duplexes or fourplexes, but three to five single family homes in one particular market.
That makes sense for you from an investment perspective and then move to another market, geographically different, usually in another state where you continue to build your portfolio, adding another three to five properties there, because you’re dealing with single units, it’s easy to diversify geographically.
Whereas if you take that same investment capital that you use to build up that portfolio diversified across three to five markets and put it into one, let’s say a 20 or 30 unit apartment building, you’re stuck to one market you’re rooted there with all your units. And the only way to diversify geographically is to have additional investment capital where you can now start to acquire other properties, whether single families or multi-families in other markets in other States.
So it’s just easier to grow and diversify your portfolio in multiple markets using single family homes. And I guess anytime I say, single family homes here, I’m also adding in duplexes and fourplexes. I think you got that by now.
Single-Family Homes Have Low Vacancy & Tenant Turnover
So the final point I want to make is the benefit of single family homes is that both anecdotally and statistically, they have lower tenant turnover. And I saved this till last because to me, this is probably one of the biggest advantages. And one of my favorite things about single family rentals is the lower tenant turnover. For me, that is critically important because I am all about having long-term tenants. I want to have tenants that are on at least a one-year lease, ideally a two-year lease.
I don’t need anything longer than that, but I want them to stay and be happy where they live and, you know, enjoy the property, enjoy the neighborhood and keep renewing their lease for as many years as possible. Because the bottom line again, figuratively and quite literally is that tenant turnover is expensive.
It’s costly. It takes money and time. You know, there’s a cost to a turnover and there’s downtime. So here’s lost rental income. So I don’t want the lost rental income. I don’t want to pay my property manager all too often for that turnover because they’re going to make a fee on that turnover. And they also have to take the time where it’s vacant to clean repair, any damages, take care of wear and tear market, and show the listing, you know, screen applicants.
So, you know, you may only have a downtime of three, four days in a really hot market, but just assume that it’s probably going to take two weeks or maybe three. And so you’re going to have a month of vacancy plus the first month, or maybe the first half months of rent going to the property manager as the cost of that turnover.
It’s not the cost of the turnover, but it’s the lease-up fee. So, but that’s not going in your pocket. That’s going to your property manager for the service of turning over that property and releasing it. So turnovers are costly. It’s actually probably the biggest cost in owning property and you budget for this, of course.
So it’s not like it’s a surprise expense. You budget for maintenance and repairs and you budget in your performance for vacancy and turnover. So you’ve already factored it in, it’s baked into the cake, you’ve accounted for it, but the less turnover you have, and that’s my point, the less turnover you have, the more consistent and predictable your cash flow is.
And that’s your short-term gain. Your long-term gain is equity, growth, and appreciation, but the short-term gains are monthly and annual cash flows. So I want to keep that going as much as possible, as long as possible. So this is the big thing for me is the lower turnover, the tenant turnover, one person or company that I like to follow is John Burns real estate consulting.
So I know John Burns and some of his data shows that 52% of single-family residential renters are families. You compare that to multifamily residential properties and that’s 30%. So that 30% are people who are more likely to be under the age of 35. And if you look at that demographic closely, you will find that they are for many reasons more transient.
They don’t tend to stay as long. For many reasons, it could be jobs, friends, getting a girlfriend, getting engaged, getting married, moving up, moving down when you’re dealing with apartment and apartment residents or dwellers that profile. And that demographic is just more transient.
It’s just normal. There’s nothing wrong with it. It just is what it is. The average single-family, residential tenants stays for three years. That’s average. I’ve had tenants stay for five-plus years. So it’s not uncommon to have a very long-term tenant, but the average SFR or single-family residential tenants stays for three years. And that’s roughly double the average apartment tenure, which is roughly about one to one and a half years.
And also another interesting little fact is that single-family, residential tenants often will stay five or six years as long as you’re not above-market rent. If you’re at, or just below fair market rent, they have a good deal in other words, and they know they have a good deal and you’ve got a house in a great neighborhood and it’s safe, clean, functional.
It is not uncommon to have people stay five, six years, or more. It’s not unheard of in the single-family, residential space and over time, that just means a considerable cost saving. So that’s just money in your pocket. I think it’s well worth it. Single-family homes are easy to acquire, easy to understand, easy to repair, easy to address, easy to fix, easy to deal with, easy to show.
There’s just a lot of benefits. In my opinion, if I’m sounding pretty excited about this last bullet point of having lower tenant turnover, it’s because I really am. I think this is a big deal and I don’t think enough people talk about, you know, how important it is and how beneficial it is.
Advantages of Buying Single-Family Rental Properties
Buying single family rental properties has a lot of advantages such as forced savings for retirement, tax benefits, increase in wealth, stable income, and long-term capital gains. Single-family homes have the widest market appeal. In a softening marketplace, real estate that houses jobs (retail, office, etc.) will generally show rental weakness before the real estate that houses people (single-family homes). Changes in job indicators give investors in single-family homes opportunities to re-position faster than investors in commercial property can.
Single-family homes have lower rates of vacancy (downtime) than commercial property because there are more potential renters for a single family home than there are for a gas station or a big box store. Single family homes have the most attractive financing terms available. Single family homes will never become technologically obsolete. What technology could replace the need and desire for a place with four walls and a roof where humans sleep at night?
Contrast this with an investor who buys a retail center and then internet shopping and a slow economy make this retail center obsolete. Corner video stores are being replaced by Netflix and streaming movie downloads. Movie theaters are being replaced by home entertainment systems. Soon you may see gas stations becoming technologically obsolete because of major changes in the ways we travel and fuel our vehicles.
At the very least, gas stations of the future will require expensive retooling that will erode years of profits for the owner. Although real estate is relatively illiquid, single-family homes typically sell faster and have more liberal access to financing than any other type of real estate. Single family homes can be purchased with cheap, fixed-rate financing, with a thirty-year amortization and a 20-25% down payment.
Apartments will usually be financed at a higher interest rate and require 30% down, plus you’ll pay a large premium to get an interest rate that is fixed longer than 5 years, and you’ll have an amortization period of 20 – 25 years. If a house and an apartment unit generate an equivalent net operating income, the house will provide superior cash on cash return due to the better financing available for single family homes.
There are two general approaches to single family property investment – Fix and flip investing and buy and hold strategy. Each approach has its advantages and disadvantages, depending on whether the investor is aiming for short-term or long-term capital gains.
Buy And Hold Strategy
Buy and hold real estate investing is the process of acquiring real estate, particularly rental property, to own and profit from over a long period of time. Buy and hold real estate is a great way for investors to diversify their investment portfolio and achieve financial freedom.
Fixing and Flipping
Fix and flip involves buying real estate, repairing or renovating it, and then reselling it for a profit. On the other hand, the buy and hold strategy is often referred to as buying and holding rental property. The investor buys and holds the property with the expectation that it will generate dividends through rental income. Fix and flip real estate strategies often require a lot of work because repairing or renovating a house usually takes months.
It is also considered a bit riskier, especially for new investors venturing into real estate. Nevertheless, fix and flip investments are lucrative because the investor can earn huge profits after reselling the property. You may not earn so much as a flip, but investing in a rental property is a permanent income. You don’t have to deal with any problems or tenants if you don’t want to. It's easy to hire a property management company and you can work the numbers in before you purchase the property.
Single Family Homes Can Be Purchased in ‘Bite Size’ Portions
Using the ‘bite size’ investment strategy with single family homes gives you flexibility in your tax and estate planning as well as making it easier to harvest equity. If you want to cash out some of the equity in your real estate portfolio, you can sell or refinance one or two single family homes rather than liquidate an entire apartment building.
The same ‘bite size’ concept applies to income taxes. For example, offsetting a stock loss with a real estate gain could result in ‘tax-free’ real estate profits. Please note, income taxes are a very specialized subject. I am not a tax professional. Always consult your tax advisor.
The income tax benefit from depreciation strongly favors single family homes over commercial property. Single family homes can be depreciated over 27.5 years while commercial property is depreciated over 39 years. The shorter depreciation schedule of single family homes can be a great boost to an investor’s initial cash flow.
Avoid all vacant land investments! These take specialized skills to manage, are difficult and expensive to finance, and are very hard to sell. I know many people who have made huge profits buying and selling vacant land, but vacant land is not hassle-free and it definitely does not cash flow! Making money investing in vacant land requires a lot of skill or a lot of luck.
Vacant land takes money out of your pocket for taxes, maintenance, and liability insurance while it produces no revenue. If you are a new or part-time investor, just avoid vacant land. Many people call vacant land “the alligator” of real estate investing because it slowly eats away all of your savings.
A word on buying condominiums: Don’t! While a condo may give you cash flow, it is never a hassle-free investment. I’ve spent years of my life developing, owning, and managing condominiums. I HATE THEM! The only winner in the world of condominiums is the developer who originally sells the condo to the general public.
Condos come with the huge, wasteful expense of a Home Owners’ Association (HOA). These collective management groups have different names depending on the location of the property and are sometimes called Property Owners’ Association (POA) or the ominous-sounding Horizontal Property Regime. Cooperatives (co-ops) are legally very different beasts than condominiums, but they are all hideous investments.
- Overpaid vendors
- Restrictions on property usage
- HOAs are run by an untrained volunteer board
- HOA dues are variable
- Your neighbor's failure to pay means you pay
- Lower rent and higher operating costs
- Higher costs of financing
- The inability to get condo financing can decimate condo values
- Non-volunteerism/Double management expense
These negative factors apply to all types of condos: retail condos, office condos, storage condos, residential condos, but none of these factors apply to my favorite cash flow investment… single-family rental homes!
8 Single-Family Homes
- Purchase Price: $100,000 x 10 houses = $1,000,000
- Net Operating Income at 8% CAP = $80,000
- 25% Down payment = $250,000
- Cost of 75% Financing (@ 5% 30-year fixed) = $48,312
- Positive Cash Flow = $31,688
- Cash on Cash Return = 12.7%
16 Unit Apartment Building
- Purchase Price: $62,500 x 16 units = $1,000,000
- Net Operating Income at 7% CAP = $70,000
- 30% Down payment = $300,000
- Cost of 70% Financing (@ 7% int. only) = $49,000
- (25 year fully amortized payment $59,369)
- Positive Cash Flow = $21,000
- Cash on Cash Return = 7%
Forced Savings for Retirement
One of the top advantages of buying a single family rental property is that it is a great way to save for retirement. A single family rental property is a good source of regular passive income. The rent is often used to pay off the mortgage for the property. Once the mortgage has been fully paid, the landlord has the choice of whether to hold the rental property for a monthly check or sell it for lump sum profit.
Rental property owners also have significant tax benefits, which is one of the advantages of buying a single family rental property. The IRS allows tax deductions for property tax, repairs, and ordinary and necessary expenses for managing the rental property. Costs of supplies and materials, as well as maintenance and repairs needed to keep the property in good condition, are also deductible. The biggest benefit is writing off depreciation, which can save you thousands each year in taxes.
Long-Term Capital Gains
Single-family rental property investors purchase properties to rent them out, with the expectation that the property value will increase in the long-term. Landlords can sell their single family rental properties at a profit when the market conditions are right. This is especially profitable for real estate investors who leveraged their rental property investments.
Investment With Leverage
You can buy a single family rental property with a 20-25% down payment and a mortgage loan for the balance. In other words, you get a $100,000 investment for a $20,000 cash payment which means you are using a relatively small percentage of your funds to make the purchase. For the leverage to work in your favor, the real estate prices in that location should not decline. In real estate markets where prices fall significantly, homeowners can end up owing more money on the house than the house is actually worth. With good credit, it is not difficult to get financing for a rental property. ‘
A Tangible Investment
A single family rental property is a tangible asset unlike financial investments such as stocks, bonds, mutual funds, and other financial instruments. You can call it your own and it lets you have better control over it. You can sell it whenever you want to.
Unlike the stock market, the real estate market is not prone to sudden and extreme fluctuations of price. Certain factors such as population growth and growing demand for housing and rentals ensure that the investment you make on a single family rental property will be a profitable one.
Increase In Wealth
Real Estate is the best avenue for long-term investment for the accumulation of wealth with minimum risks involved. No other asset increases wealth the way real estate does. Real estate is a powerful wealth-building tool that has made millions of individuals millionaires over a period of time. Appreciation of a property is one of the biggest ways to increase your wealth as a real estate investor. You can do it by choosing the right properties in the right market and managing them the right way.
With the current real estate market conditions in the US, now is a great time to invest in single family rental homes. Compared to the low yields in stocks and bonds, rental properties are a good source of regular monthly income. For investors wanting to diversify their portfolios, tapping into this market with the help of a good realtor or turnkey provider can provide higher ROls.
There are factors to consider when choosing a real estate market for single family rental property investing, such as population and employment growths, and increase in house values. When buying single family rental properties located in a different city or state, investors also research-purchase prices, taxes, and housing regulations. Other investors also look at the percentage of the population that is renting. For instance, D.C., New York, and California have the most renters, in terms of percentage of the population.
So let me just wrap this up by quoting something from a recent Zillow article. And I’ll just quote right from the article here. It says among young adults, renters of single-family homes have always tended to move less often than apartment renters and single-family home rentals are one of the fastest-growing market segments. Uh, unquote. So there you have it.
I hope this has been helpful for all of you again, you know, I just need to compare a single-family to multifamily rental properties as fairly as possible. But like I said, I have a preference and I have a little bit of a bias, but I’m not saying that one is bad and I’m not saying one is better than the other.
It really comes down to your personal criteria and your investing goals. But you also have to consider what is your investment budget? What is your investible capital? What is your access to financing and what you qualify for? And last but not least, you need to ask yourself what is my risk profile.
And especially if you’re thinking about single-family investing, you know, let us help you put that strategy together because it’s probably a very good fit for you. And my team of investment counselors is certainly here to help you. Norada Real Estate Investments helps take the guesswork out of real estate investing. By researching top real estate growth markets and structuring complete turnkey real estate investments, they help you succeed by minimizing risk and maximizing profitability.
Click on the link for the complete list of investment properties for sale in the various real estate markets of the U.S.