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 a superior cash on cash return due to the better financing available for single family homes.
Single family homes can be purchased in ‘bite size’ portions. If you have the capacity to buy $1,000,000 of real estate you are generally better off buying ten single-family houses for $100,000 each than to buy a single apartment building with sixteen units of $62,500 each.
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%
6 Tips For Investing In Single Family Rental Homes
As you already know that a single family rental home a standalone property on its own lot. Single family rental market usually runs due to few common reasons like affordability and a stable income in return. In the US, most of the real estate investors are looking for markets with single family homes which can be converted into rentals. In the US, prime Manhattan or downtown San Francisco are not the hub for investing in single family rental homes, as a matter of fact, it is usually the outside localities away from city centers.
1. Make sure you choose the right property
Ensuring that you have a steady rental income stream is the key to making the right choice. Investing in real estate is all about capital growth, so choose a property that is right for you and your income requirements.
2. Make sure the math adds up
Investing in single family rental homes is a great way to see long-term financial growth, however you need to be able to hold onto the property for the long-term to see your investment reach such dividends. Do the maths and make sure you have enough patience for the long game.
3. Make sure you find a professional property management company
Once you find the right property management company, they will do their job allowing you to sit back and enjoy the rental income. When selecting your property manager look for a company which is reputable and approachable and ask them questions. Reach out to their existing or previous clients and get the first hand feedback of their services.
4. Buy a property in an area that will guarantee renters
This is crucial to earning a good return on your investment. If you buy in an area where the demand is low, your property may remain uninhabited for weeks and months on end. Make sure you buy in an area that is experiencing some growth and hire a reputable turnkey provider for it.
5. Hire Turnkey Rental Property Providers
A true turnkey rental property is an amalgamation of a well determined process with the asset. A turnkey property is a property which is immediately available to rent out, often a refurbished home sold by providers. Turnkey properties are good options for single family rental homes and are most suited to investors who are not looking for the deep introduction into real estate but would rather like to reap its rewards quickly. A renovated property with a sorted tenant, property management and maintenance makes an ideal turnkey investing system.
It is advisable to take a conscious decision before getting into this, as not every turnkey property qualifies this criteria. You can easily get this kind of rental ready property through a reputable turnkey rental property provider. To begin with, it is mandatory to research thoroughly to identify the right deal, so an investor should consider places beyond their local area. Learn new markets rather than just playing it safe, as this will open doors for new opportunities. Successful property management can play a major role in the long-run, and finally understand the importance of leverage and find a nice financial partner.
Turnkey dealing may sometimes turn a bit ugly if you go for a distressed property such as a REO and then do the renovation on your own. Hence, consulting a good turnkey provider will help you in acquiring a renovated property with a qualified tenant and they will even manage the property. To know more about how to finance turnkey rental properties, click on the link.
Norada Real Estate Investments is once such company which is a true turnkey property provider. It 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.
To know more about how to buy turnkey rental properties, click on the link.
6. ‘Bite size’ Investment strategy With Single Family Rental Homes
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 skill 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 neighbors 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-volumteerism/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!