When researching real estate invest strategies, you may notice that many real estate investment experts recommend investing in multi-family homes and complexes in order to maximize your income and create longevity for your investment.
But is this the only way? There is something to be said for the benefits of building a real estate portfolio of single-family rental homes.
The primary benefit of investing in single-family homes over a multi-family complex is the ability to charge more money per renter based on the increased value of a single-family home versus a condo or apartment in a multi-family complex.
Depending on your markets and capital assets, single-family properties may actually be your best bet.
It is important to do thorough research; your personal financial situation and the real estate market will impact your investing strategy. In some areas, single-family properties can be extremely lucrative investments.
In this article, we'll closely evaluate the differences between single family or multi family investment properties. We'll also take a look at the primary benefits of investing in single-family homes and how you can ensure that your investment continues to flourish long-term. Let's get started.
Why Are Single Family Homes a Good Investment?
There's an endless array of real estate investing strategies to choose from, and the best one for you will align with your skills, interests, and financial ability.
Here are some of our top reasons why building a portfolio of single-family property investments may be more beneficial than investing in a larger multi-family complex.
Higher Rates on Single Family Homes for Rent
As a general rule, single-family properties generate more rental income per unit than multi-family complexes made up of apartments and condos.
Due to the additional square footage and tenant benefits such as private parking and yard space, landlords can charge a premium for single-family homes versus single unit apartments or condos.
Your rental opportunities may be more limited, as a single-family home can only be listed to a single renter versus a multi-family complex. Typically, landlords are able to charge more of a premium rate for single family homes.
Utility Bills Lower on a Single Family House for Rent
In single-family investment properties, utilities and other services are often more easily managed compared to managing utilities and services for an entire complex.
Landlords with single-family homes are often able to offset utility bills to tenants, making the property management process much more hands-off.
In fact, it is common practice for tenants in single-family residences to pay all of their own utilities without involving a landlord.
Higher Quality Tenants
In many markets, single-family homes attract higher-quality tenants. There are a number of reasons why these types of properties attract higher-quality tenants, but, the primary driver is the higher rental price point.
Individuals, couples, or families who choose to rent single-family homes often pay higher rent and therefore are more likely to care for your property as their own.
In addition, in single-family homes, it is not uncommon for landlords to include certain property management clauses within their leases.
For example, the tenant may be required to care for the yard, manage snow removal, and more.
In a multifamily complex, it would be very unlikely that a landlord would be able to incorporate these types of clauses into a tenant lease, making it the responsibility of the landlord to manage these tasks.
Additional Tenant Benefits, Including Private Parking and Yard Space
In addition to attracting higher-quality tenants, landlords of single-family properties often spend less time finding tenants vs. multi-family properties.
This is in part due to the high demand for single-family homes for families, but also the additional tenant benefits that come with renting a house rather than an apartment or a condo.
These benefits include a more private living space, garage or private parking, a yard or other outdoor space, and in general, a property with larger square footage.
Less Maintenance When You Buy a Single Family House for Sale
Particularly when you're a new or beginner real estate investor, the maintainance and upkeep associated with owning an investment property can be daunting.
Single-family rental properties are often less bothersome for landlords solely based on the fact that a single-family property requires significantly less maintenance than a multi-family complex.
When it comes to a single-family rental property, tenants are expected to maintain the property as if it were their own.
However, landlords with single-family rental properties are not entirely off the hook for ongoing maintenance and emergency repairs.
It is, however, less likely that these repairs will be to the scale and cost of similar repairs in multifamily complexes.
More DIY-Friendly and Easier to Manage than Multi Family Rentals
Single-family homes are often much more accessible for landlords who prefer to do repairs and ongoing maintenance themselves, rather than hiring a property management company.
However, it is important to note that it certainly is more cost-effective to hire a property management company when managing a large portfolio of single-family homes.
The types of repairs and ongoing maintenance required for a single-family home versus a multi-family complex are often cheaper unless you're specialized, so you can do this work on your own or hire a general contractor or other professional.
In multi-family complexes, there is often significant infrastructure that requires a specialized role to conduct maintenance. This can end up costing you more money in the long term.
More Financing Options
When purchasing a single-family home as a rental property, there can be significantly more financing options available than when purchasing a multi-family complex.
For this reason alone, investing in single-family properties is often much more accessible and affordable for the average investor.
This is particularly true if you are investing as an individual rather than a conglomerate of investors or an incorporated partnership.
In the real estate investing world, investing in single-family properties is often the easiest way to break the barrier of access into investing.
Easier to Sell than a Multi Family House For Rent
Single-family homes are also significantly easier to resell versus multi-family complexes.
When selling a single-family rental property, your options of buyers are a wide scope of real estate investors, as well as individuals, couples, or families who are looking to buy a home to live in.
By contrast, selling a multi-family complex drastically limits your pool of potential buyers to only high-profile real estate investors with the capital to invest in a multi-family complex.
If you're looking to maximize your rental income, occasionally you can find two single family homes on one lot, which can offer great potential for rental income.
How to Evaluate a Single-Family Home as an Investment
Understand Your Investing Strategy
Before embarking on buying a one family house for sale, it is important to understand your personal investment strategy and how you plan to cover all expenses.
It is also important to do thorough research on how your generated income will impact your overall profit and net cash flow.
Another essential question to ask yourself is: can you afford unexpected costs such as problematic tenants and months where your property may not be rented?
It is also important to prepare yourself for the possibility that your home may have negative cash flow and may not show appreciation over a long time.
We highly recommend choosing a home that will not only offer you a month-to-month income, but also has a high potential to appreciate in value over the holding period.
This will help ensure you earn a profit, whether you invest in 1 or 2 bedroom single family homes for rent or something larger.
A larger home can be especially helpful if you plan on renting a single family home to multiple tenants. For example, 4 bedroom single family homes for rent can fetch high rent, depending on your area.
Determine Your Budget
Next, it is important to determine your budget or investment parameters so that you can guide your search in a strategic and realistic way.
When setting your budget, it is important to consider the size and type of single-family home, the condition of the home that you are looking to purchase, and the market in which you're looking to invest.
We highly recommend speaking to and working with professionals in your area to ensure that you are creating a budget and strategy that is aligned with your investment potential and limitations.
Create a Sample Pro Forma Financial Statement
When looking to invest in a property, real estate professionals and investors often use a pro forma, which is a term the industry uses for a comprehensive estimate on a property.
This estimate is a valuable way to guide you through the property selection process by crunching the numbers and doing a side-by-side comparison of available properties for your investment.
When creating a detailed pro forma, there are a number of inputs and factors that should be included.
You'll want to ensure that you can properly analyze the numbers and compare properties side-by-side to determine whether an investment will be lucrative or not.
Some input that should be included on your pro forma spreadsheet include:
- Purchase price
- Down payment amount
- Amount of your loan
- Interest rate
- Closing costs
- Equity required
- Potential rent range
- Effective gross income
- Costs of renovations or repairs
- Operating expenses
- Property and other taxes
- Management fees
- Other costs associated with running your investment
Additional Factors to Consider
Your decision to invest in a single-family rental property comes with additional factors that need to be taken into consideration to ensure that your investment continues to show returns in the long term.
Here are some of these additional considerations:
Sometimes the best investment market is not necessarily the market where you happen to live.
We encourage investors to conduct comprehensive research on local markets and their area including cities, suburbs, and properties that may be available in other locations.
It is important to consider when investing in a property that is outside of your geographical area how you will continue to balance your landlord responsibilities with accessibility to your property.
If you choose to purchase a rental property outside of your geographical area, it may be wise to hire a property management company to help address ongoing maintenance and emergency repairs.
Keep the 1% rule in mind.
Typically, investors expect that a single-family home should generate a monthly rental income of 1% of its purchase price. By this calculation, a $100,000 house should rent for roughly $1,000 per month.
There are a number of factors to take into consideration for this calculation including the expected growth and development of the neighborhood and the rental market in your area.
Don't be afraid to negotiate on the purchase price while keeping in mind this 1% investor rule.
An important factor you should consider when choosing to invest in a single-family home is how much the property will generate in rental income.
The amount you can charge in rent will be based on the property's details.
Some of these details will be more impactful for certain types of renters comparable to others, but it is important to consider these factors across the board to ensure that your property is remaining competitive in the rental market.
These factors include:
- Total square footage
- Additional living space such as a basement or outdoor area
- Number of bedrooms and baths
- Parking type and accessibility
- Pet policies
- Amenities, such as laundry, outdoor space, and more
- Whether the rental will be furnished or not
- The type of lease you are willing to offer
- Utilities that will or will not be included
Tools and Resources to Help You on Your Investment Journey
Here are some of our favorite tools and resources to help you begin your investment journey.
Roofstock Real Estate
Roofstock is an online investment marketplace with the mission to make real estate investing accessible, cost-effective, and simple.
Through their innovative investment, marketplace investors can purchase and own residential properties anywhere in the world.
Roofstock offers scalable services for first-time investors and is the most experienced asset manager worldwide.
Opendoor is a new way to sell your home entirely online without the need for showings or dealing with tricky buyers.
Through Opendoor, sellers can list their property through a preliminary offer and sell their home through photo and video walkthroughs.
For real estate investors looking for single-family homes, Opendoor can be a research tool for finding property analytics for homes in your area.
Opendoor is also a great way to check out homes in other areas so that you can find the market that is best suited for your investment.
Offerpad is another online home-selling service that you can use as an investor to gain property insights and invest in single-family homes in the marketplace of your choice.
Offerpad is an entirely online real estate marketplace that matches available homes with interested buyers and investors all for a low fee and without the inconvenience of in-person home shopping.
Offerpad is a great option for areas that may be under strict COVID-19 protocols making shopping for real estate a difficult and sometimes lengthy process.
Knock is an innovative online real estate marketplace that allows buyers to purchase their new homes without having to sell their previous homes first or at the same time.
With Knock, you can invest in a new single-family home and take possession of this home without ever having to sell a previous investment.
Through Knock's services, owners are only required to pay one mortgage at a time, making it significantly easier to transition or upgrade real estate investments.
Investing in Single Family Homes: The Bottom Line
No matter if you are new to real estate investing or are a well-established investor with an extensive portfolio, single-family rental properties can be a lucrative and beneficial long-term investment.
Managing a portfolio of single-family homes can not only be cost-effective, but it also can be significantly easier to manage as a landlord than other forms of real estate investing.
We hope this article will help you to begin your thorough research on investing in single family vs multi family properties in your area to see if single-family home investing is the right option for you.