Investments in single-family housing rentals may not be as visible as investments in larger multi-family housing communities, but single-family homes are attractive options investors should consider. Single-family residences may cost more upfront, but they could have less overhead and a higher payoff when eventually sold.
Single-Family vs. Multi-Family Rental
Single-family rentals are typically one unit, such as a house, whereas multi-family rentals include apartment complexes and duplexes. Landlords of multi-family housing often have to pay for water, trash, yard care, and potentially heating. Those significant costs cut profitability. Single-family home tenants often are responsible for all utilities, lawn care, shoveling, and other expenses.
Balance your returns on a cost-per-unit basis. While multi-family dwellings cost less on a per-unit basis, they often have more costs like yard care by design. There’s also more turnover and more management required for multi-family properties. Multi-family investments are popular and a way to consolidate several investment housing units in one building. If you’re interested in larger units, multi-family loan options are available.
When it comes time to sell, single-family homes often hold their value better. They are more resistant to market declines that could lower the values of townhomes, condominiums, and other multi-family housing. Demand for family-friendly single-family home rentals is high. It is crucial to invest in single-family rental homes at the right price and with a solid budget and strategy in mind. Rental property loans offer a wide variety of housing investment options.
Before considering a real estate investment, know your budget and financing. Consider how much money you have available for the investment and how much is available for a down payment. Decide how much debt load is comfortable, and have contingency plans for vacancies and unexpected repairs and maintenance. Finding a budget that works could include cash, bank loans, and private lenders. Be sure to spend time researching possible interest rates and other fees. You also may want to consider partnering with another investor to share the expense.
As with all real estate, it’s all about the location to a certain extent. Investors may consider hotter markets that could be in another area. You should take the time to research current and future demand for housing in various neighborhoods. As with anyone who is thinking of buying a house, schools, crime rates, convenience to businesses, commute, and public transportation are key considerations. Learn about the property values and rent prices in areas you consider. Visiting houses for sale in targeted areas and talking to investors in those areas is a wise idea as well.
Expenses to Consider
Expenses for single-family homes need to be carefully tabulated and compared to potential income. Recurring fixed expenses include property taxes, insurance, regular maintenance, property management services, utilities not paid by future tenants, and homeowner’s association dues. Single-family homes won’t have the often costly association fees townhomes and condominiums have, but some neighborhoods may have homeowner’s association fees.
Variable expenses to plan for include unexpected repairs, high costs like new shingles and appliances, legal fees, and vacancies. It’s best to over-estimate potential expenses when evaluating potential investments.
Evaluation of Investments
Evaluation of potential rental property investments involves several considerations that take purchase price, rent, and other figures into consideration. There are several quick calculation methods available:
- The 1% rule is a calculation that sets the rent at a minimum of 1% of the purchase price.
- Several investors use a 2% rule, setting rent at 2% of the purchase price.
- The 50% rule means expenses minus mortgage payments equal about half of the rent when averaged over the year.
- Cap rate calculates the net operating income divided by the purchase price. The net operating income is the annual gross rent minus operating expenses, excluding the mortgage principal and interest but including taxes. The cap rate helps investors compare a real estate investment against other investments. An example of the cap rate is a $200,000 house that rents for $24,000 a year with operating expenses of $12,000. The amount of operating income of $12,000 is divided by the purchase price of $200,000, giving a 6% cap rate.
Take time to investigate each of these quick calculation methods in order to determine the best one for your investment.
Develop a strategy for future investment goals by weighing holding a small number of properties to pay them off with the possibility of more profits and more debt by having more properties. Professional property management is another consideration. Companies that specialize in handling rentals often take about 10% of the rent for their services. Saving money by doing the management part yourself will require knowledge and willingness to screen tenants, handle maintenance and repairs, take calls from tenants, and deal with late or unpaid rent issues.
Every investment has some risk, but the real estate market has its ups and downs creating the potential for more risk than other investments. Individual properties can have issues like vacancies, legal matters, unplanned repairs, damage by tenants, and rising costs like taxes. Consider your risk tolerance and how you’d handle such situations prior to investing in a property.
It’s wise to have an exit strategy as part of an investment plan. Backup plans are good to have if there are issues or the time comes to move on to a different investment or retirement. Renting out the home and paying down the mortgage over time is a strategy of many investors. Investors could rent out a home for many years and decide to sell or sell shortly after purchase.
Buying for a good price is a wise investment in itself. If you have equity right away, you’ve got options from the beginning of the process. Some investors choose to “flip” the house after making repairs and updates, selling it to another homeowner or investor. Investors may also refinance the mortgage to pull equity out of the house for future investments.
Single-family rental investments require careful consideration but can offer a substantial investment, income stream, and payoff when sold. They can provide a good income stream and build up investors’ equity, especially since single-family homes are in demand for families. As with all investments, there are risks and special considerations. For more information reach out to us at Titan Funding. Our team members have the experience and knowledge to help you get started.