Anyone Creating (or Created) a Real Estate Portfolio with SFH?

Question

Anyone having major success with only buying SFH and renting them out to tenants to make good cash flow each month and re-investing?

Also, if you increase the rent each year, does this mean you can get a higher cash refinance?

Stuart Udis · Answer

@Bob Asad Don't fall for the trap believing you will build a fortune off of single family rental cash flow. I am not suggesting you can't be successful building a SFH portfolio and to an extent cash flow is necessary to operate the portfolio, secure financing etc., but SFH's are one of the more inefficient asset classes to own. Those who are most successful buying SFH's buy in markets that experience a sudden appreciation event/spike in home ownership creating an end buyer market that no longer consists primarily of investors. Markets that experience this generally realize a sudden appreciation event over a short time period and then the appreciation levels off or slows. Understanding this, there are three reasons why single family investors fail to maximize the potential utilizing the SFH investment strategy:

(1) This investor buy SFH's singularly focused on cash flow and ignore the fundamentals that are strong indicators of market appreciation and the transition event to higher home ownership. The category 1 investors buys in stagnant markets where they likely feel as if they are running in place and the inefficiencies of owning SFH's wipes out cash flow.

(2) This investor owns SFH's in a market that possesses the fundamentals but sells prematurely and fails to take advantage of the primary appreciation event.

(3) This investor fails to recognize the equity generated through the primary appreciation event is better served being reinvested in more efficient asset classes that will generate a greater return profile after the primary appreciation event occurs. It's better to fall into the category of investor 3, but even those investors fail to maximize the benefits of the equity they generated.

Investors in category 1 & 2 generally have a difficult time with dispositions. If they are able to sell to a home owner, its usually the home owner who can barely qualify for an FHA mortgage, turns over extensive repair addendums because they recognize they don't have the means to handle home repairs on their own and must have the home 100% move in ready. In addition, this owner occupant buyer normally requires the maximum seller concession credits just to qualify. Alternatively you can sell to an investor but the investor buyer usually has plenty of optionality in the markets that don't reach the transition phase which eliminates most negotiation leverage. The disposition of SFH's in markets that fail to turn is one of the most overlooked and grueling aspects of this strategy.

10 Years ago when I first began investing I grew a 30+ SFH portfolio in a neighborhood in Northwest Philadelphia and it pains me to say I fell into category 2. At the time I was legal counsel at REIT as my primary employment and the SFH's where viewed as a passive investment. The neighborhood possessed the correct fundamentals and even though home ownership was low, I was securing, teachers, nurses, resident physicians etc. as tenants but mistakenly focused too much on the cash flow. I sold the portfolio in individual transactions to mainly FHA buyers in 2015-2016 for $140,000-$170,000 and by 2019 most of those homes were resold for $275,000+. I like to share this story as a cautionary tale and while nobody has a crystal ball and can predict the future, understanding the end goal can help investors understand whether they invested in a market that can reap the true benefits of SFH rental ownership or perhaps point them in that direction.

Todd Anderson · Answer

Every investor has their own Investing goals. there is no one best investment strategy that is right for everyone. I have invested in most every category over 30 years and I have found they all work, if done right. The investors that I am working with now are mostly in doing their investment in SFR or small multi fam . They are investing for cashflow in markets were the appreciation in obvious. They are refinancing in 1-4 years and reinvesting in the next property. This is a steady way to invest and grow wealth, and it can be done very passively. The biggest thing I have learned is to pick your market intelegently. In today's world with the tools we have you don't have to only invest where you live.

Basit Siddiqi · Answer

I have a portfolio of just SFH's.The good thing about a SFH is that you have a larger pool of end buyers(retail buyer).

Charles Perkins · Answer

I built a solid retirement portfolio from SFHs with added value. We have more than enough to fully retire any time. Before retiring though I will fully develop two properties.

All of our properties have had good appreciation, cash flow and tax savings from the start. The value add has made several properties really great. Location, timing, good due diligence, and good maintenance all aid in success

Corby Goade · Answer

I mostly buy SFH and am going just fine. It's absolutely possible, but much of that depends on the market you invest in.

No, you generally can't get better cash out on SFH by increasing rents- you're confusing CAP rates with comps. SFH are valued based on comps and the income they generate is totally irrelevant to conventional lenders. DSCR lenders would likely consider that income, but you'll get much less favorable terms, so in many cases, it defeats the purpose.

David Krulac · Answer

@Bob Asad I have had great success buying and renting SFH, but also doing other real estate actions. I am currently working on a big flip, of a property that I never rented. I have done land subdivision and develpment, and have owned multi-family, as well as commercial property. I have bought and sold over 1,000 properties for my own inventory, and did Bigger Pockets Podcast #82, and have spoken coast to coast from Manhattan to San Francisco on real estate topics, and wrote a book on my experiences.

So I can't say I did it all on SFH, but renting houses has been a big part of my real estate investments since I first started investing. (the story of my first investment in told in the BP POdcast #82). I've refined and updated my buy box, currently SF detached houses built since year 2000, with 3 bedrooms, 2+ baths, central air, and 2 car garages, in areas with good schools, low crime and economic growth. In different states I have bought SFH in the fastest growing counties in those states. I seek out tenants who will stay a long time, reducing vacancy, and turnover costs. I have had multiple tenants who have stayed 30 years+ I have a 24 year tenant who just signed a new extension. Excluding properties recently purchased my average tenant stays 12.5 years. They also mow the lawns, shovel the snow, pay most if not all utilities, and provide most of their own appliances. I do not raise rents every year. I almost always raise rent at the end of a lease, and when there is a turnover, I raise the rent higher than I would for a continuing tenant. The 24 year tenant who just renewed is paying $460 more under their new lease. I rely on the Fair Market rents on the HUD website, www.HUDuser.org and my rents are almost always above the median rents on that site. I also look at other online sources for comparable rents and try to make sure that I don't fall to the bottom 50 percentile. When market conditions are on the down turn like 2008, I was always full, and seldom had vacancies. I may not have been raising rent every year, but I never lowered rent either, same for the COVID year. Renting SFH is not as flashing as some other real estate, but its always steady and people always need a place to live.

Anyone Creating (or Created) a Real Estate Portfolio with SFH?

Anyone Creating (or Created) a Real Estate Portfolio with SFH?

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