Are you considering real estate investing, but maybe aren’t sure where to start? Single-family homes are a smaller-scale investment, compared to a commercial venture like investing in an apartment building. There are several ways you can generate income with single units, including buying a property to flip, buying a unit to turn into a rental property, or buying a vacation unit to rent out on a continuous short-term basis. If you’re considering a single-family unit investment, there are several key benefits to keep in mind.
Why Invest in a Single-Family Home?
A single-family home is a standalone property that consists of one living unit — unlike a duplex, which has two units, or an apartment complex, which has many units. Investing in a single-family home is beneficial for several reasons, especially for new real estate investors. Here are a few reasons why.
The Purchase Price is More Accessible
Let’s start with the obvious—a single-family home is typically cheaper than a duplex or an apartment complex. And with that lower purchase price comes a lower down payment—less money upfront. The lower down payment makes investing in a single-family home a lot more accessible, especially to first-time investors. And once you purchase one single-family property as an investment, you can continue to purchase more rental properties when you’re ready, growing your investment portfolio over time.
There is Increased “Tenant Stickiness”
Tenant stickiness is the likelihood that tenants who are renting a home or apartment will choose to renew their lease. Tenants of single-family homes may stay for longer for several reasons, including:
- Increased privacy compared to multifamily housing
- More space, including storage space and possibly yard space, basements, attics, garages, parking spots, in-unit laundry, etc.
- Stronger emotional attachment because the home feels like your own
It’s Easier to Manage
Unless you’re an experienced property owner with a portfolio of larger buildings, fixing a roof on a single-family home seems a lot more manageable than fixing the roof of an apartment building. If you’re managing the properties yourself, it’s may be easier to manage a larger single unit than it is to manage five different single-bedroom apartments. If you’re just getting into real estate, a single unit may be the best way to get your bearings.
There is Higher Market Appreciation Potential
One of the biggest benefits of investing in real estate is appreciation — the value of the home going up in time. Single-family homes tend to appreciate at a faster rate than duplexes and apartment complexes, making your investment pay off in a shorter time frame.
You Won’t Need a Commercial Loan
You can purchase a single-family home with a mortgage loan—no need for a large commercial loan! If you’re adding to an established portfolio, however, you might have the same commercial loan options as those looking to purchase an apartment complex.
The Investment is More Liquid
Even if you’re purchasing the home with the intent to rent it out for the indefinite future, you never know what could happen. If you need or want to sell the property, it’s a lot easier to sell a single-family home rather than a duplex or an apartment complex.
How to Invest in Single-family Homes
As you begin your investment journey with single-family homes, you’ll probably have a ton of questions. There are a lot of forums and even Facebook groups full of advice, but here’s another tip: your local mortgage lender can also give you advice on investing in single-family homes! Whether the property is in your direct area or farther away, someone with knowledge of the local market can give you specific tips about how and where to buy.
Know the 1% Rule
When looking at different properties, be sure to consider the 1% rule, which states that in order to be able to afford monthly mortgage payments, property owners should charge at least 1% of the purchase price as monthly rent. For example, if the purchase price of a home is $500,000, then monthly rent should be at least $5,000. If you wanted to move forward with that purchase, you would want to secure a loan with a mortgage payment of less than $5,000 to ensure that the mortgage payment will be covered by the rental income that you bring in each month.
Prepare for Expenses
Consider the 50% rule, which guides investors to expect about 50% of a property’s gross income to go towards expenses—not including mortgage payments. These expenses might include property taxes, repairs, insurance, loss of rental income, legal fees, and more. Of course, these numbers may fluctuate, but when considering properties and crunching numbers, this is a good rule of thumb to keep in mind. You don’t want to just barely cover your mortgage.
Don’t Limit Yourself to Where You Live
You may think that if you want to purchase an investment property, it needs to be located in the same area as your primary residence. This isn’t true, and not always the best option! There is a lot of technology today that makes investing in other locations more of a possibility—you can communicate remotely and hire someone to do the day-to-day property management tasks for you.
Second, investing in a property that is in a separate location from where you live is a way of diversifying your investments. If you live and work in the same place as your investment property, you are subject entirely to the ups and downs of that particular market. By opening up your investments to other locations, you can diversify and capitalize on markets that are experiencing a boom. Also, your dollar may go a lot farther in different locations.
Think Long Term and Prepare for Ups and Downs
Compared to multifamily homes, single-family rentals are a lot easier to purchase, easier to manage, and easier to sell if the need arises. And with single-family rental investments, you can grow your investment thoughtfully over time.
Investing in your first single-family home might be the first step of a lifelong real estate investment. You can view your real estate investment portfolio the same way you would view a stock market portfolio—try not to become pressured to make quick decisions based on fluctuations in the market and know that there will be ups and downs and do what you can to prepare. And just like the stock market, your investment will probably get better with time—so think about starting today.