One of the best ways to build a strong real estate portfolio is through rental property ownership. As profitable as rehabs and flips are, it is always wise to think about the future. A strong rental property will not only yield short term monthly cash flow but also give you potential appreciation down the road. There are many investors who are intimidated at the prospect of owning a rental property. They have heard horror stories from landlords and feel that those negative experiences will happen to them. However, for every disgruntled landlord, there are nine who are ecstatic with the property. The most popular starting point is with the purchase of a single family property. Large apartments and multi-unit properties are great, but you should work your way to that point. If you are still on the fence, here are a few benefits of single-family investment property ownership
Price: While home prices have increased, they have still not taken off like some analysts expected. This has created a great opportunity to own rental property. Instead of having to come up with the entire purchase price, you can take ownership by leveraging the banks’ capital. With home prices leveling off, there are still some great properties out there for good values. Instead of looking for quick rehab properties, renting may be a better option. Lower purchase prices typically give you higher cash flow. Home prices will not stay this low forever. Once they begin to rise, there will be less profitable rental properties on the market
Down Payment/Approval: There are arguments on both sides as to whether a multifamily purchase is more advantageous than a single family. What cannot be argued is how much easier it is to purchase a property with just one unit. For starters, down payment amount is greatly reduced. Instead of coming up with 10-20%, most multifamily properties are a minimum of 15-25%. In addition, the interest rates are, on average, a full point lower for a single family unit. What may be more important is the difference in the loan approval process. Any property over two units is more heavily scrutinized. Everything from the appraisal to the insurance to the inspection will be picked apart. This is not to say a single family approval will be easy but it will certainly be much easier than a five unit property.
Cash Flow: Cash flow is one of the main attractions of rental property ownership. It can be define as the residual income after factoring in rental income, mortgage repayments, reserves and expenses. Not every property is the same but single family properties give you a good chance at generating cash flow. The combination of low home prices, 15% down payment and low interest rates will keep your expenses in check. With the right property in the right market you may be able to demand a strong rental price. The combination of factors leads to increased cash flow. Multifamily and mixed unit properties can offer this as well but it takes more things to go right with the increased number of units.
Management: There are those that argue multifamily property management is just as easy as one single family property. In theory this makes sense, but in practice, single family properties have fewer obstacles. Instead of dealing with two or three units, you are solely focused on one. You don’t have to deal with potential headaches between multiple tenants. Two disagreeing tenants in a two family property can be a difficult situation to deal with. With just one unit, you have a good idea of what you are in for from the beginning.
Selection: In almost any market, the number of single family properties dwarfs that of multifamily ones. This allows you to pick and choose between markets and areas to figure out what is best for you. There may be an occasional bidding war on the way in but you will reap the benefits when you sell. Most new investors prefer single family rentals, meaning that your property will hold some appeal. Commercial and mixed use properties have seen a decline due to higher down payment amounts, high interest rates, and longer transaction times.
Appreciation Potential: You should never buy a property solely based on future appreciation. There is just too much that can happen to the market over the years to ensure a price increase. That being said, there is always the possibility that the value will increase. Partially based on the demand, single family values tend to rise much quicker than any other type of property. If, and when, values do begin to take off, you have a much better chance of seeing a single family home appreciate quickly than a four unit home.
Rental Demand: Demand for rental property doesn’t appear to be slowing down any time soon. There are still thousands of renters who are a long way from homeownership. There is a large segment that prefers renting over owning. If you find a good rental property, you can keep it in your portfolio for years basically on autopilot. Instead of stressing out at the end of every lease, you can quickly and easily find tenants. Single family properties are typically more appealing than multifamily homes.
If you have a long term approach to the business, there is no reason to ignore single family rentals. A single family rental can have a stronger percentage return than homes two and three times the price. There are pros and cons with every type of investment. Do your homework and see which rental option is best for you.