Single family homes generally aren’t typically what most think of with successful real estate investing. Most often we’re led to believe it’s the duplexes, quad-plexes, and small apartments or commercial space that are bragged about.
Our rentals are all single family dwellings. They’re all stand alone houses, except for the Airbnb, which is a condo.
Why do we focus on single family homes for successful real estate investing? There’s a bunch of reasons, but overall, they quite simply WORK.
Single Family Homes: IDEAL when you’re just getting started
By and large, single family homes are cheaper than duplexes. And bonus, you only have to find one tenant. In some markets you just don’t have the demand for rentals, and filling a duplex or quadplex can be more challenging.
Sometimes you luck out, and the rental you purchase already has signed-on tenants living there. (Granted, having instant tenants can be a blessing or a curse!)
Chances are, you have enough bandwidth in your life to tackle property management for a single family rental. One of the keys to making DIY property management is to find rentals within a half hour drive of where you live.
The shorter the round trip, the less time commitment involved. We live within 15 minutes of our single family homes. I’ll even bike to them on occasion, with tools in my backpack for whatever job needs doing.
More practically, a single family home is easier to finance. You’ll pay about 50% more for an equivalent quality duplex and maybe double the cost of a SFH for a quadplex. More on the specifics of financing a bit later.
Sidebar: Lessons in landing tenants
When we purchased our first SFH rental, it took us almost two months to land our first tenant. Two factors played into that lag: One was the season. We closed on December 30 in the dead of winter. Fewer tenants are looking to move between November and March. Holidays and the weather keep us hunkered down.
Another factor was the house was a total MESS. The previous owner was a bachelor who really didn’t seem to be bothered by filth. For example, the master bedroom ceiling fan looked as if it had never been cleaned. A cat’s worth of dust coated the blades. Nasty.
So imagine having prospective tenants stop by for a showing. They’re not going to appreciate the place as much when there’s mops, buckets, loose hardware parts, tools, etc. lying around.
Showing a rental in the evening, especially during the dark months of wintertime is not a good idea. It’s already dark before you even get out of work. As a prospective tenant or as a landlord, you’re tired and probably hungry.
Even with my best customer service hat on, no unfurnished home with lots of maintenance crap lying around, on a winter evening, is going to look appealing. The best thing to do is hold open houses during the sunny AM hours on Saturday or Sunday. Let the natural light filter in. Everyone is in a better mood because it’s the weekend.
Single Family Homes are easy to list and you avoid tenant conflicts
Craigslist rules. I love it. Super easy to use, free, and widely adopted by people looking for rentals. In fact, it’s the only “tool” I use to list our rentals whenever a lease is about to end, or when a new rental is brought online.
Think about it. With a duplex or a triplex or quadplex, you need to make the listing very specific for each of the units within the dwelling. This isn’t a big deal when you’re turning over an existing property, but it is more of a hassle when you set it up the first time.
Seekers can easily get confused about what unit is available, and worse, they might balk at signing a lease if they don’t like who’s already renting the next unit over.
Here’s an example of one of our Craigslist listings:
$1495 / 2br – 822ft2 – Home Available June 1!
Cozy 2 bedroom house with nice-sized closets, and 1 full-bath for rent (in neighborhood xyz). The home has a large open kitchen and dining area, with gas range/microwave, dishwasher, and stainless-steel refrigerator. Other features: Washer/Dryer/Central Air/ and a brand new furnace installed in 2018. There is a one-and-a-half car detached garage with opener. The backyard is fenced-in, making it perfect for dog lovers.
TERMS: Rent is $1,495 per month with a $1,495 security deposit ($1,475/$1,475 for a 2-year lease). A single dog (40 lbs. or less) is welcomed, for an additional $25 per month pet-rent, and an up-front non-refundable pet-fee of $200. All pets must be approved by landlord, prior to occupancy. Tenant is responsible for all utilities, snow removal, and landscape/lawn care.
Please respond to this ad to arrange a showing. The following are required to apply for a lease:
– Completed application, including credit and rental history (credit and background checks are performed)
– Application fee of $40 per adult tenant
– A valid driver’s license or passport
– A CREDIT SCORE OF 650 OR HIGHER IS REQUIRED
The home is located ______________. Great dining establishments, library, post office, and grocery store are all within a walking distance!
As for tenant conflicts? All I have to say about this is remember your days in the college dorm, or any time in your life when you had a shared wall with a neighbor (apartment, townhouse, row house, whatever). Noise complaints can be a huge annoyance to a landlord. Never mind other conflicts like blocked driveways, strange odors, stolen packages, etc. etc.
Single Family Homes require less up-front money
With rentals, the downpayment for single family homes is generally 5%-10% less than it is for duplexes. Having to put down 15% or 20% cash at the outset sure beats 25%. Consequently, the cash on cash return is better for SFHs.
On a $150,000 rental property, 20% down is $30,000 vs. $37,500 at 25% down. With a SFH at 20% down, you’ve got $7,500 left in YOUR pocket for any repairs or improvements (or other investments).
Remember that cash is king. You really want to minimize how much out-of-pocket you need to get this asset up and running. The more you plunk down up front, the lower your overall return on investment. This is why I’m a huge fan of cash on cash analysis when it comes to evaluating rental property investment return.
Single Family Homes typically produce more responsible tenants
This is huge. It makes for a more passive, less intense landlord situation. As I’ve mentioned already, single family homes are ideal for someone who’s willing to take on property management him or herself. And if you rent a higher value home in a highly desirable neighborhood, the less hands-on you’ll be.
Contrast that with multi-unit rentals in so-so neighborhoods… I’ve heard plenty of horror stories from my good friend who got me into real estate investing. He focuses solely on multi-unit dwellings in his portfolio. Just about once a month or so, he shares yet another anecdote about one of his tenants. And it’s never a good story.
There’s the time he had the coin-boxes broken into on his coin-op washing machines. There was another time he inherited a chain smoker who chain smoked indoors. He still can’t get that nicotine loveliness out of the place. The kicker was the time he had a toilet leak from an upper unit that found its way into the living space of the unit below. Yuck.
Single Family Homes are easier to maintain
Lawn care, snow removal, and general landscape maintenance can be performed by the tenant. With a duplex, you could also have the tenants pick up the slack, but then you get to three and four plus tenant dwellings and suddenly, you are on the hook. These services can put a dent into your rental returns. Especially in the upper Midwest, when snows run deep!
Speaking of snow and winter, my good friend and mentor ran into another dilemma earlier this year. The boiler started to flake-out whenever temps dropped below 10F. We had quite a few of those days this past winter. Yeah, you could wind up with a boiler in a SFH too, but at least in that instance, there’s only one set of tenants royally pissed. My buddy was dealing with four sets of tenants at a quadplex. After nearly a month of attempted fixes and fails, he ultimately had to replace the boiler for nearly six grand. Oy.
As a landlord, you’re still responsible for all the “big picture” landscaping needs. Planting, pruning and removing trees are on YOUR list. Though I had a tenant once who was so keen on removing an old tree stump, she was willing to pay out of her own pocket to get it done. We split the tab.
The one thing I handle myself is seasonal gutter cleaning, once in the fall and once in the spring. Luckily, only two of our four city rentals require any intense cleanings. And very luckily, all of our houses are single level ramblers. That means I don’t have to risk my life and limb on five houses (ours included) every time I hike up a step-ladder.
It’s more of a cosmetic thing, but I appreciate having just one single provider of satellite or cable television at each of our rentals. This avoids a wasteland of DirectTV dishes mounted to the structure. Half the time I wonder how much damage those mounts do to the roofing, and whether Joe Installer did a thorough job caulking-up the new holes in the shingles.
Sooo attractive. Ever heard of Netflix?!? Credit: CapeCharlesWave.com
Single Family Homes appreciate in value better
It’s comforting to know that if you have to sell at any given point down the road, selling a SFH is a helluva lot easier than offloading a duplex or quadplex. Again generally speaking, single family homes appreciate in value better than multi-unit dwellings, and that’s mainly because SFHs are located in higher demand locations.
Keep in mind that buyers for single family homes will far outnumber folks looking for duplexes or bigger. Now, that’s obviously balanced by the sheer volume of SFHs compared to the multi-unit homes, but when a market really heats up, the SFH is the unit type that’s in highest demand.
Single Family Homes do have some cons
The one con with single family homes is the impact of vacancies. At least with a duplex or bigger, a single vacancy is offset if the rest of the building is leased. With a SFH, it’s either sink or swim. That’s why it’s super important to choose a solid house in a high demand neighborhood, where the rental market is strong.
Another con with single family homes is that they generally won’t make as much cash flow as a multi-unit dwelling, all things being equal (e.g., fully leased and well-maintained).
A big reason for this is that multi-unit structures have some maintenance efficiencies (bad boilers aside), like a single roof, foundation, and sometimes you can have tenants shared the washer/dryer. And, you can be more efficient with your time, since you have a single destination for maintenance and inspections. I, on the other hand, have to high-tail it all over town to separate SFHs during inspections and maintenance, twice or more per year.
All that said, I’m still pretty convinced that single family homes are ideal for those starting out in the landlord biz. I haven’t had to evict a single tenant in five years with four units. No problems filling vacancies. And most important, cash flow continues to, well, flow. And finally, the houses continue to appreciate like bonkers. On average, each of our four units have gone up 36% in value since purchase.
Successful Real Estate Investing: Resources
I highly recommend a couple of books for starting out in the single family rental business. Building Wealth One House at a Time by John W. Schaub, and First-Time Landlord by Janet Portman (a NOLO guide-book). I’ve referenced both quite often, especially in the early years of our rental adventure.
A couple of my favorite blogs on single family homes are Invest Four More run by Mark Ferguson (an old school Mr. Money Mustache commenter and provocateur) and Afford Anything run by Paula Pant (also an MMM provocateur when it comes to bicycle commuting topics). Mark and Paula take different approaches to their businesses, but they both are strong believers in single family homes.
Lastly, there’s ME. I’m happy to guide anyone through the process I use to find and manage single family homes as real investment wealth builders. Look me up and let’s start your journey today!