Avoid single family as a new investor?

73 Replies

Hey all! I’m a relatively new investor & I was talking to some buddies and they basically told me to avoid single family like the plague because if one person leaves you’re at 100% vacancy. What do you guys think? I’ve also hear grant cardone say this & also say don’t shop for real estate based on your budget. I have about 30k i’m comfortable investing eith right now. My area is relatively cheap so I can buy a single family for 45k. 20% down and rent it for $700-$800. Any suggestions would be great.

SFH investing is high risk due to the value of the homes being driven by personal home buyers and high expences.

Some may work especially if you can buy at $40K with financing and charge a rent of $800 but vacancies will be a issue. Expenses per tenant  are also proportionally higher than in a multi unit.

Your plan would work if you could get a 30 year fixed mortgage on a 40K property, 20% down with rent at $800 unfortunately no bank is likely to finance any property valued under 50K.

You will need to buy all cash and the opportunity value at 10% on 40K is $330/month. With rent at $800, expenses at 50% ($400), deduct the cash flow you are buying with your 40K ($330) and your positive cash flow produced by the property itself is only  $70/month. Hardly worth the effort when there are far better deals in multi units with lower risk. Owning th eproperty is hardly much of a investment.

I have found there are banks that will loan under 50,000 with a 30 year mortgage so don't let that be the thing that stops you. If the numbers work......start where you are at.

Originally posted by @JR Rivas :
Hey all!

I’m a relatively new investor & I was talking to some buddies and they basically told me to avoid single family like the plague because if one person leaves you’re at 100% vacancy.

What do you guys think?

I’ve also hear grant cardone say this & also say don’t shop for real estate based on your budget.

I have about 30k i’m comfortable investing eith right now.

My area is relatively cheap so I can buy a single family for 45k. 20% down and rent it for $700-$800.

Any suggestions would be great.

 Keep in mind the target audience for Grant Cardone. Accredited investors with at least $100,000 to invest. I agree with his advice if you fall into that category. I also agree with him in that owning one door is a bad idea. 

Grant does not know or understand single family investing. He also doesn’t know or understand flipping, wholesaling, note investing, or even other commercial real estate investing. Keeping that in mind and the fact he is trying to sell his own product, he gives misleading advice to sway people away from the other investments.

I like single family. I think the barriers to entry are lower and it allows people who don’t own their own profitable businesses or have high paying jobs the opportunity to invest in real estate. I think owning a single door is a bad idea though and the only way investing in single family can work well is if you own enough units.

I know many investors that do great with SFRs.

One huge benefit is that you can offload ALL expenses, like lawn care, snow removal, and all utilities.

@JR Rivas I like sfh because if you buy right you have the possibility to sell for top dollar if you fix it up nice. Duplexes, etc sell for a multiple of rent....no emotions.

From my perspective as a handyman in a high-cashflow area, it's going to depend on the SFRs. I like inexpensive 800-1200 ft2 2 bedroom/1 bath brick houses built post WWII with forced air furnaces, low slope and simple roof starting 15 ft off the ground, neat little chain-link yards. There's are whole streets of duplexes in my target area built like this.

Small places like the ones I'm describing, the roof, gutters, and chimney aren't particularly dangerous or complex for a single skilled handyman with Craigslist helpers to replace and maintain very cheaply. The electricity isn't knob and tube and doesn't present much difficulty to maintain and modernize, the plumbing is all pretty simple (single stack). The trees outside aren't old enough to present a serious hazard to the sewer lines and the properties were all fitted with copper water lines to start with. Furnace goes bad, you switch it out, chimney goes bad, easy to line it, the brick's modern and hard and so is the mortar, gas lines are minimal and limited to basement and kitchen above at worst, and all the interiors are finished using materials and measurements easily compatible with more modern housing. Small fridges and appliances fit easily in and out of standard-sized doors. Small brick houses like the one I'm describing was designed to be maintained in the postwar economy almost 100% by the male head of household in his spare time. A handyman landlord working with minimal help can do good work in these places, stay on top of things, and keep perhaps ten of these tight little ships running with practically zero outside labor costs eating into his profits or excessive time commitments, while he does modest, leisurely little spec rehabs and occasionally larger live-in flips anywhere he finds deals, accelerating his timeline to  pay off his street of moneymakers.

 As @Steve Vaughan pointed out, full costs for utilities, lawn upkeep, and snow removal are easily offloaded to the tenant, and if things go crazy on the small lawns the fixer landlord can step in with his equipment and save the day before the municipality gets on his back.

It's an affordable way for people with ordinary incomes to get into REI. Is it scalable? Not past a certain point. Will you get rich quick? Dream on, bubba. But once that street of dreams is paid off, and it can be done MUCH more quickly than most people would imagine, all sorts of things can be done with a little group of unencumbered properties like these.

I do not like or dislike an particular deal or asset class.  It either makes sense at this moment or it does not, based on my goals.  Generally, I am looking at the numbers to determine cashflow.  There are advantages and disadvantages for every type of asset.  The market tells me where I am going to invest, not the other way.    

The main advantage of multifamily is scale.  It is difficult to buy 20 sfh at a time.  If you compare like for like, sfh are more profitable.  Multifamily have additional expenses that are not present in sfh. Trash, sometimes water, common electric for lights, etc.  In most cases, multifamily is more transient and has more turnover.  There is less liquidity in multifamily, should you need to sell, there are fewer buyers.  

You can get a lot of good advice on BP and from other investors, but I would view it with a critical eye to validate it.  There are very few hard and fast RULES, they should be seen more as guidelines .  

@JR Rivas

Single family houses totally rock. I've not heard of Grant Cardone so I have no idea why this is even a conversation. Single family houses are an amazing investment, when done right. Everything sucks if you're doing it wrong!

You need to be attending local investor and REIA meetings to learn quickly what's going on and what investors in your area are doing. All real estate is local. Single family houses would not work, for example, in most of Lower Manhattan.....

Find your local meetings at MeetUp.com and NationalREIA.com

Learn what investors in your area are buying and where the big players are making their money.

Good luck!

Every asset class has different pros and cons. Managing multis is more difficult, because you now have to deal with interpersonal issues- neighbors sharing a wall and they cant get along. But the cash flow is usually better and you can consolidate maintenance and capex. If you are trying to sell a SFH 3/2, your market is basically everyone looking for a house. If you are trying to sell a multi, there are far fewer people shopping for those properties, especially in a down market.

My point is, invest in what you feel comfortable with and what you understand. Especially for your first investment. If you understand it, you are more likely to buy right and manage it properly, which in turn, will create opportunity for you to stretch a bit on your second purchase, or your eighth. 

I was happily taking a nap when summoned unprovoked by my buddy @Jim k ;)

I like sfrs, but do like smaller multis better.  At this stage of the market cycle, take what your area provides at a price that pencils for you. I've stopped/paused hunting in my area, but sounds like affordable small houses are abundant in yours, JR.

One caution on your $45k price point.  Conventional banks don't normally operate under or offer sub $50k loans.  If you have $30 to take down a $45k house, hopefully a local community bank can do it with 20% down or you can do proper seller financing where you own it (not a Land Contract) or something.

  Call around to banks to see who will do these small loans before you get too far.

@JR Rivas Why not have both? You have to walk before you can run (typically). Point being, buy single family to start. Easier to manage, less expenses like utilities. I always hear the vacancy argument but my tenants stay on average 3-4 years. Pretty sure that negates the multifamily vacancy argument. If you can afford to go buy a 50 plus unit apartment building that rents for 1000 or more a unit then yes that will be superior to my 50-60k house that rents for 800. However if you’re buying apartments that rent for 600 or so, your turnover could be a lot more then mine. Also your time and management will be a lot more. I spend an hour a week (if that on my rentals) and I am getting to the point where scaling from my couple now to 20 or 30 plus rentals will be very doable. Of course this is all moot since you’re comparing apples to oranges. Start with whatever you want and ignore 99 percent of what cardone says. It’s self serving since he wants you to invest with him and then charge you absurd fees for the priveledge of doing that
Originally posted by @JR Rivas :
Hey all!

I’m a relatively new investor & I was talking to some buddies and they basically told me to avoid single family like the plague because if one person leaves you’re at 100% vacancy.

What do you guys think?

I’ve also hear grant cardone say this & also say don’t shop for real estate based on your budget.

I have about 30k i’m comfortable investing eith right now.

My area is relatively cheap so I can buy a single family for 45k. 20% down and rent it for $700-$800.

Any suggestions would be great.

Did Grant Cardone sit one-on-one with you over cup of coffee, looked at your situation and provide you with a tailor made advice? I am willing to wager that he did not. Until that happens take everything you hear on books/tapes/CDs/podcasts with a grain of salt. Also try to trace back and see the desired audience, and assess whether you fall in that category or not. 

Like in most cases in life, the answer is it DEPENDS.  In investing in small multi family units, I always look at the neighborhood. If its a decent B- neighborhood, I will go ahead and buy the property. Sometimes small MFs are located in pretty rough neighborhood.  In that case, you are better off finding a single family house, in a decent neighborhood. You will attract better tenant. 

I have both.. Small MFs in OK area, and SF in good areas, and I will decided whether to invest or not based on the deal. 

@JR Rivas I would recommend a single family home, preferably vacant, for your first deal. There is a steep enough learning curve to the first property without layering the complexities of a multi on top of everything else. A vacant single family teaches you processes: buying an investment property, assessing and performing whatever fixup needs to be done, marketing to get it rented, collecting applications, the legalities of your state's tenant/landlord laws.

It's true that when it's vacant, it's 100% vacant, but as you learn how to be a landlord, it won't be vacant often and then it's 100% occupied. Start with the easiest type of deal you can do and see how it works. You can branch out from there if you want.

Good luck,

Dennis Burian

Who's Grant Cardone? 

:D 

OK, so that's a running joke of mine here. On a serious basis, there's no right or wrong answer as it depends on where you want to invest, your ultimate goal and what's available. I have made a raft of money on SFHs so ignore the naysayers. There are advantages and disadvantages to both. The 100% vacancy rate is a dumb argument because you should be comparing apples to apples. If you have an apartment building with ten apartments, you compare that to ten single family homes, not one single family home, because a) you are not going to buy a 10-unit apartment for the price of one SFH, in the same area, and b) your comparison purposes are always units to units. If you have one home, you have one unit. If you have a 50 apartment building, you have 50 units.

If you want to scale to some very large level, that's difficult to do on your own with single family housing, and is usually the reason people switch. Beyond that, however, there's some great advantages to SFH over MFH - offloading all maintenance expenses, being mixed into better (hopefully!) neighborhoods, general appeal to Americans, the ability to pare off a single unit (you can't chop off 5 of your worse apartments), diversified geographic locations (if the neighborhood your apartment building is in tanks, you tank), etc. And there are disadvantages - more roofs to take care of, competing with homebuyers for inventory, etc.

In my area MFH is a poor deal. Most of what we have is owned by large conglomerates that can operate on very slim profit margins that smaller operators like me can't (or won't) touch. There's also not much, relatively speaking, of it, so what does come up for sale is poorly priced relative to potential profit. Finally, there's a strong ethos for living in SFH in my area and a negative connotation with apartment dwelling.

Do what your preferred area, your goals, level of expertise and access to funding tells you to do. 

Hi JR,

It really depends on what you are looking for.  SFRs will give you a higher appreciation over time but less cash flow.  Multi Units will allow you to spread the risk over a few units.  In your case maybe finding a duplex or a 4 unit will be a good idea.  You can still get a conventional residential loan up to 4 units.   

When you sell the SFR you will be selling to buyers and investors down the road. Multi units you will be selling to investors. I like SFRs for this reason. I feel like its a great niche to be in. My investment strategy also allows me to have the house vacant while I find a renter. You gotta look at what fits best for you.

@JR Rivas the 100% vacancy argument against SFH is flawed. Let's compare to a duplex. Although only HALF the property is vacant, it happens TWICE as often. Total vacancy cost is the same or higher than SFH. It can be higher because vacancy is only part of turn over expense. Rerenting the units requires time or expense to a PM and there is also improvement expenses to make a unit rent ready (paint, carpet, etc.) The easy way to avoid 100% vacancy with SFH is to own more than one.

Grant Cardone will tell you the only path to success is multifamily, but other experts out there have made millions in single family homes, like Dave Ramsey for example. But keep in mind in both cases, these guru make most of their money selling their training programs (Grant selling sales training and Dave selling financial responsibility). 

I would argue it is less important where you start in real estate and more important that you get started. I am also wondering, your buddy that gave you the advice, what does his real estate investment portfolio look like?

Sfr, Str, Duplex Mf etc. to me it is all about understanding the numbers, your market, and making them work. Figure out what your goals are, and a path to success. Personally I now prefer MF, but I know investors who do very well with SFR.

There's no "one" right answer in real estate.  There are investors that love single family and investors who don't.  There are investors that love Section 8 and investors that don't.  Investors that love office buildings.... well, you get the point.  There are pros and cons to single family just like there are pros and cons to everything.  It depends on what you're looking for, how it fits into your life, your budget and where you are in your investing career.  I started with single family and kept moving up in size.  But I know plenty of people that stay in single family.  There's no magic bullet in real estate.  That's a good thing.  It's the reason not everyone does it and the reason why there's an opportunity for all of us on BP.

@JR Rivas Not sure if anyone else has suggested this yet or not, but have you thought about using the unit as a short term rental like airbnb? Depending on your area that potentially could bring you in higher yields, thus more cash, to get it paid down and reduces your risk. Just a thought.

I've never understood this logic, unless you plan to buy one house, only one house, and no more, ever, and paying out a couple hundred bucks a month to keep the place standing is going to kill you.

On average you'll probably have lower vacancy in an SFH anyway.

This is a very subjective question, and honestly depends on what you're comfortable with, and also will depend on the market. I personally have 1 SFR in my portfolio, and if it wasn't for my current amazing tenants, I would probably have offloaded it by now. Whenever these tenants move, it's gone. It's 1 door for the entire property, so if the unit is vacant, then I don't have cashflow to pay for the expenses (mortgage, etc), and as a result, i need to make sure i have more money in reserves to do so. This is made worse if I have to do some rehab to turn the house around.

I much prefer multi-family.  Currently have an 8 unit that we are rehabbing, and once its up on the market I'll only need to have 50% occupancy to cashflow all expenses, which means I can manage risk better, and this only comes with having multiple doors.

Bottom line is, multiple doors will obviously give you more flexibility, but at the end of the day you should invest in what you want.  We have to have some fun while we do this, right :)

@Nirtej W. There are pros and cons to SFH. As others have indicated, if you turn a tenant you have 0 rent until it is re-rented. However it is typically easier to get a loan a SFH and they tend to be more liquid if you need to sell in a hurry. You can do well with SFH; I have a friend who just retired at 31. He and his wife live off of their rental income which is 100% SFH derived.

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