A single-family house is a structure maintained and used as a single dwelling unit, according to Realtor. Single-family homes are the most popular type of real estate and therefore the most common.
They can be in city areas, suburbs, or in the countryside. Single-family houses can have one or more kitchen(s), a living room, bathroom(s), bedroom(s), garage(s). They also come with yards of all sizes depending on the location.
If you own a single-family home, you have complete ownership of the house, yard, and the land that comes with it.
In this article, we are going to discuss with you details on the advantages and disadvantages of owning a single-family home as a rental property.
Table of Contents
1. Advantages of Single-Family Rental properties
a. They are easy to finance
Many people love single-family homes. For this reason, the majority of single-family homes are bought by people who want to live in them.
It is easy to buy a single-family home because banks and money lenders make it easy for people to get mortgages. Homebuyers need a good credit score and a 20% down payment to qualify for a conventional mortgage. If your credit score is not good, learn how you can improve your credit score faster.
Those who cannot find enough down payment or with a bad credit score can still buy a house using the Federal Housing Administration (FHA) mortgage. On top of having a downpayment and good credit scores, home buyers must show proof of employment that will help them to cover their monthly mortgage payments.
b. There are too many single-family homes
There are a lot of single-family homes than any other type of real estate investment. Property developers spend a lot of money building them because many people want to own them.
If you choose to invest in single-family homes, you will have a lot to choose from.
In addition, you will have a lot of buyers when you decide to sell the property.
c. Long-Term Tenants
Usually, tenants who prefer single-family homes are more stable financially and family-oriented. They have good jobs somewhere, have children to raise, and therefore, they do not move very often.
This is a good thing to landlords because they only worry about getting a tenant into the house. Once they have a tenant, they collect cash flows for every long time.
Furthermore, you will not have rehab expenditures very often. This will help you financially and speeds up your journey toward financial independence.
d. Cheap to buy and easy to sell
In general, single-family homes are cheap to buy compared to multifamily homes like a duplex or a triplex.
However, when it comes to the Return On Investment (ROI), a multifamily home will give you more return.
For example, you can have 3 tenants on a triplex whereas you will only have one tenant in a single-family home. Keep in mind that the triplex could be a little expensive compared to a single-family home.
In addition, it is easy to sell a single-family home than a multifamily home. The majority of people buy single-family homes as their primary residence. Not everyone wants to be a landlord and go through the stress associated with tenants.
e. Some single-family homes do not have HOA fee
Some single-family homes have no Home Owner Association (HOA) fee. In other words, you will not pay any fee to any association, by owning a single-family home.
Without the HOA fee, your profitability on the house will increase. It is difficult for a rental home to have positive cash flows if there is an HOA fee added to it.
Note that some single-family homes come with an HOA fee. It is your responsibility to work with your real estate agent and do your math to make sure that the house will still cash flow after HOA fee adjustments.
f. They come with more freedom
Single-family homes have fewer restrictions compared to condos, town-homes, or other multi-family homes.
You can do whatever you want at your house as long as you follow your city’s guidelines.
For example, you can increase the square footage of the house, do inside renovations, and do your favorite landscaping without anyone knocking on your door.
You will still need to get a permit from the city before you do your renovations.
g. Single-family houses have a better appreciation
Single-family homes do appreciate much better and faster than condos and town-homes.
You can force an appreciation on your property, for example, by increasing its square footage, replacing the carpet, kitchen renovations, etc.
If you don’t want to do any renovations, your house can appreciate naturally over time.
h. Single-family houses have more privacy
You get a lot of privacy when you own a single-family home. This is because you can have a bigger yard (or land) that comes with the house and you have the freedom to redesign your surroundings.
You can put up a fence or plant trees to block a neighbor’s view of your property. As a result, your family, friends, doggies, and kitties are free to party without any complaint.
Privacy is a major reason many tenants love single-family homes. They can do whatever they want and experience the benefits of a single-family home.
2. Disadvantages of single-family rental properties
a. High competition
We have seen that single-family homes are more common compared to other types of properties. This makes the competition of buying or selling one a little difficult or easy depending on the market and location.
Let’s assume that you want to buy a home for rental. In the neighborhood you want to buy in, there are other people who want to buy as well.
So, you are not only competing with other investors but also with random forks who want to buy houses for their primary residences.
It will be difficult to compete with people who buy houses because they like the patio or a deck. Or because they think their dogs and cats will love playing in the yard.
These people do not have an investment mindset. Therefore, they will bid even above the market value of the property just to own it.
What bout you? Well, your offers will depend on your calculations. There is a limit on how much you can offer. If you go above that threshold, the property will not cash flows. This is why it may be difficult for you to get a good deal.
b. It takes longer to scale them up
The main purpose for rental owners is to make money through cash flows and hopefully retire someday. If for example, a typical rental house in your area cash flows $250/mo and you want to retire when your accumulated cash flows are $5000/mo; you will need to have 20 rental houses ($250/mo per unit multiply by 20 (number of units) is equal to $5000/mo).
It can be hard or easy to buy 20 homes depending on the location, personal income, and market. The process is simple. You buy one house, rehab it, have a tenant in it, and repeat.
If you repeat this process, you can be able to accumulate your target of 20 homes with ease. However, as you buy more houses, your debt goes up.
Banks and creditors use debt to income ratio to determine if you are qualified for a mortgage. This ratio calculates how much debt you have compared to your income. As your debt increases, you will enter a red zone where you will not get a loan until you improve your financial situations.
The other thing is that for every house you buy, you will go through the entire buying process. This means house hunting, paying all closing costs, and do all paperwork which is tedious and expensive if you are doing it multiple times.
c. You pay more money per unit
Single-family homes can sometimes be expensive due to market, competition, and location. For example, a single-family can cost $250,000 whereas a duplex will cost $300,000 in the same area. From an investment viewpoint, it is better to buy a duplex.
This is because you will go through the buying process once to own two units. In addition, a duplex will increase your odds of having a tenant in your property. You will still make money even in one unit is vacant.
On the other hand, your single-family home will be 100% vacant when your tenant leaves. The mortgage and other expenses will be coming out of your pocket.
d. Could be expensive to rehab
As a landlord, you will be happy when you have long term tenants. This is not always the case. Eventually, your tenants will move on and the property will be vacant. What happens after your tenants leave? You need to rehab the property and find other tenants.
This process can be easy if your tenant(s) was good or tedious and expensive with a bad tenant(s). Maybe they had dogs and cats that chewed on the carpet, or they made holes into the walls, and therefore, you need to fix it.
Single-family homes, tend to have more renovations compared to like condos, or multiple units. They have a lot of rooms that get trashed, big yard (sometimes) that need landscaping, etc. If you are doing all these major projects every time a tenant leaves, you are going to run into trouble financially.
Final Words
Single-family homes can be a great investment and it is easy to start small. If you don’t have a big budget, start with one unit and scale up slow by slow.
It is possible to have positive cash flows from investing in single-family rental properties. You will need to bargain on the prices, win the competition, and stay away from HOA locations.
Besides, you will be able to sell your properties easily if you decide to upgrade to multifamily rental properties.
