Warning: Your Single Family Rental Portfolio Might Just Be a House of Cards

Warning: Your Single Family Rental Portfolio Might Just Be a House of Cards

5 min read
Paul Moore

Paul Moore is the managing partner of Wellings Capital, a private equity real estate firm.

Experience

After college, Paul entered the management development track at Ford Motor Company in Detroit. After five years, he departed to start a staffing company with a partner. They scaled and sold the company to a publicly traded firm five years later.

After reaching financial independence at the age of 33 and a brief “retirement,” Paul began investing in real estate in 2000 to protect and grow his own wealth. He completed over 85 real estate investments and exits, appeared on HGTV’s House Hunters, rehabbed and managed dozens of rental properties, built a number of new homes, developed a subdivision, and started two successful online real estate marketing firms.

Three successful commercial developments, including assisting with the development of a Hyatt hotel and a very successful multifamily project in 2010, convinced him of the power of commercial real estate.

Press

Paul was a finalist for Ernst & Young’s Michigan Entrepreneur of the Year two years straight (1996 & 1997). Paul is the author of The Perfect Investment – Create Enduring Wealth from the Historic Shift to Multifamily Housing (2016) and has a forthcoming book on self-storage investing. Paul also co-hosts a wealth-building podcast called How to Lose Money and he’s been a featured guest on 150+ podcasts, including episode #285 of the BiggerPockets Podcast.

Education

Paul earned a B.S. in Petroleum Engineering from Marietta College (Magna Cum Laude 1986) and an M.B.A. from The Ohio State University (Magna Cum Laude 1988). Paul is a licensed real estate broker in the state of Virginia.

Follow

WellingsCapital.com
Email [email protected]
LinkedIn
Twitter @PaulMooreInvest
How to Lose Money podcast

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Are you a single family home investor? Do you want to build an SFR portfolio? I did at one time too.

Then I tried it.

Not for me, thanks. Now, that’s not to say this is a bad avenue toward wealth creation. And I know a lot of BiggerPockets readers are making it big in the single family residential arena.

But many single family investors, including me, have tried to manage these houses on our own. “It’s only one house. Or two. How hard can that be?” Yeah, right.

The Self-Managing Nightmare

Self-managing rental houses introduces a set of complications that could turn into a personal nightmare—at least for nice guys like me. (And I know that most all of you are nice guys and gals.)

I only have one single family rental left in my portfolio. Even this one home causes me a good deal of hassle because the tenants (of a decade-plus) consider me their friend. And I do consider them friends—but they aren’t the type of friends I usually hang around with. (No offense to these dear people.)

My other friends don’t leave me multiple four-minute voicemails in rapid succession.

My other friends don’t text me when they need money for their cable bill.

My other friends don’t call to report details on their car problems and ask me if I know a good mechanic who will work for (almost) free.

My other friends don’t have indoor furniture on their front porch.

And there are a whole host of other reasons that self-managing is difficult. Whether you choose single family homes, small multifamily, or commercial multifamily, if you’re serious about growing your wealth, find a professional property manager.

In addition to third party management, I love the economies of scale offered by commercial real estate. As a friend and fellow investor said the other day, managing an apartment complex with 200 units is a walk in the park compared to managing 200 single family residential homes with 200 separate roofs, 200 tax bills, 200 closing statements, and capital raises and management contracts.

Related: Single Family Homes vs. Multi-Unit Apartments: Which Investment is Right for You?

Perhaps this is why, in my nearly two decades in real estate investing, I’ve noticed a trend. Many investors start out flipping houses, then graduate to rental homes. But after a certain frustration level is reached, I see many of these investors selling off their entire SFR portfolio to jump into multifamily investing.

My mentors at 37th Parallel did this. So did Rod Khleif. And Kevin Bupp. And many others.

What Happened During the Great Recession?

A dear friend and brilliant financial planner, Micah Spruill, once described a perfect investment. He said that planners and investors are always looking to invest in assets that go up during good times—and don’t go down during bad times.

When I showed him how multifamily rents rose relative while incomes fell during the recession, he was impressed.

I was impressed too, and I was even more impressed when I looked at this data over a half century. Check it out:

Rent vs Income

Look how the lines diverge during the recession. This is partially because multifamily housing experienced a buffering effect during that time. When people were losing their homes and banks were tightening restrictions, many turned to renting, buoying up multifamily rents and occupancy.

Check out this graph showing serious loan delinquencies in the recession and now. Multifamily was 90% lower than single family. And it’s now about 98% lower!

Delinquency

Note that this includes states like Florida, Nevada, Arizona, and California, all with high delinquencies. And it includes poorly run assets that dragged down the numbers.

In a previous article, I mentioned that Rod’s single family portfolio crashed and burned in the Great Recession, while his multifamily assets continued to perform well.

There was some healthy debate and questions in the comments about why that happened. After pondering this, I didn’t really have a great answer. After all, if single family rentals tanked, why wouldn’t multifamily rentals spiral down the proverbial drain as well?

I recently asked Kevin Bupp about this. Like Rod Khleif, his single family rental home portfolio tanked badly in the Great Recession. But he said his multifamily portfolio did fine. Why?

He explained that, in his case at least, his single family home renters chose other options during the downturn. But his apartment dwellers didn’t—at least to the same degree.

Kevin’s portfolio was in Florida. We’ve all heard about the devastating effects of the downturn on home prices there. Check out these graphs from Zillow:

Kevin explained what happened. Apparently, nice, new single family homes were being built by the thousands all over Florida. When the market turned, which happened overnight, these new homes that had been previously selling like hotcakes were now left empty. The builders or investors who owned them couldn’t find buyers anywhere. And many buyers would no longer qualify anyway. So what did they do?

They rented them out, but not necessarily for a profit. They just wanted to stay afloat in the crisis and were often willing to rent these beautiful new homes out for breakeven—or less. Kevin was initially unaware of what was happening. All he knew was that he was starting to get a lot of notices from his tenants who would not be renewing their leases.

He started asking questions and soon learned that these tenants were moving to nicer, larger, brand new homes for about the same rent. And they were getting move-in bonuses and concessions, probably even free semi-boneless hams (or the functional equivalent).

Related: Stop Swinging for the Fences: How I’m Building a Multi-Generational Wealth Engine the Low-Risk Way

Focus on Cash Flow

So Kevin’s growing rental empire was really a house of cards that quickly toppled. Like Rod, Kevin learned that focusing on cash flow was key. Treating appreciation like icing on the cake was a better way to view the world.

Fortunately, Kevin is young and smart and realized that his education in the school of hard knocks prepared him for his current career in multifamily investing, with a specific focus on mobile home parks.

Like many real estate investors I’ve met, Kevin took the lessons he learned and parlayed them into a successful career within the world of real estate.

This is one thing I love about the real estate investing community. While many of us were burned in the downturn and in other real estate investments along the way, most of us came back.

This is not often true for people I’ve seen who invest in in the stock market, risky angel investments, or multi-level marketing schemes. They are often done with that field for good.

So whether you’re building your fortune in the multifamily world, slogging it out with single family rentals, or somewhere else in between, my guess is that you will still be in the REI arena a decade or two from now. Those of us who have tasted the many benefits of owning places where people live would have it no other way.

Do you invest in SFRs or are you going the multifamily route? Why?

Leave your comments below!

Are you a single family home investor? Do you want to build an SFR portfolio? I did at one time too. Then I tried it. Here's what happened.