Fidelity Investments research consultant Peter Lynch famously coined the phrase, “Invest in what you know.” For most real estate investors, especially those just getting started, what they know is single family homes. Although there may be a level of comfort with single family properties it is still a good idea to weigh the pros and cons before making an investment. Here is our list of the pros and cons of investing in single family properties.
- Purchase price is lower than multi-family properties. For those who don’t have piles of cash lying around, a single family property can offer an entry point with a relatively small down payment that leaves some cash for reserves.
- Easier to finance. Single family properties can be financed with a conventional 30-year fixed-rate mortgage for those borrowers that qualify.
- Less tenant turnover. Single family tenants often have more stability in their lives. They are usually settled in their careers, like the community they live in and aren’t likely to decide to move on a whim.
- Usually no expenses for utilities and yard maintenance. Separately metered utilities allow single family tenants to be directly billed for what they use. Part of the deal for tenants who rent a house is taking care of the yard that comes with it.
- Cheaper to diversify. If you own more than one single family home you can diversity to different parts of town and between lower and higher end homes. Much in the same way you might diversify your stock portfolio between technology and financial companies.
- Bigger pool of buyers when it comes time to sell. This is a big argument in favor of single family properties if there is a chance you might need to cash out. While houses are not nearly as liquid as stocks it is much easier to sell a house than a multi-family property. There are more potential buyers (investors and owner occupants) and the sales price is not determined by how much money the property makes.
- Cost per unit is usually higher. Think of it like the difference between buying a 12-pack of your favorite soda and buying 12 cans individually. The cost per can will almost always be less buying a 12-pack.
- Financing won’t always be a breeze. After you own four homes conventional financing is out and most banks won’t lend on more than 10 homes. At that point you will either need to purchase with cash or find a portfolio lender.
- Vacancies can be painful. When you have a vacancy in a single family property there are no other tenants to help cover your mortgage payment. This makes maintaining cash reserves vital.
- The house and yard may not be kept to your standards. Most tenants aren’t the neat freaks and master gardeners we would love them to be. If the house is in a neighborhood with an HOA be sure to lay out what is expected of the tenants or you will likely be hearing from the HOA more often than you’d care to.
- Fewer economies of scale. The likelihood of an investor finding 10 single family houses built the same year with the same floor plan, heating system, plumbing and fixtures is virtually zero. With a 10 unit apartment complex all the light fixtures, toilets, countertops, paint colors and appliances are the same which can make repairs and upgrades less expensive.
- More miles on your car. Owning multiple single family properties can mean spending more time in the car driving across town from one unit to another.