Investing in Single family homes?
Member since 2021 · 15 posts · 8 votes
Investing in Single family homes?
Most Popular Reply
Jaron WallingPro Member
Rental Property Investor · Indianapolis, IN · Member since 2018 · 4k+ posts · 4k+ votes@Michael Modugno I agree with the above responses BUT... my local lender requires 25% down on the next house if you're holding the previous primary and renting it out. The new property is considered an investment property. Idk if your lender treats it the same way but that's our experience.
I try to avoid this a buy distressed properties with cash and finance out doing BRRR'ish deals. Basically the value add strategy bridges the down payment gap. We're adding $30-35K in value on a SFH. It's slow growth but the properties cash-flow and the journey goes on.
28 Replies
- Lender · Freehold, NJ · Member since 2022 · 235 posts · 85 votes3y
Hey Michael!
Other lenders right now are probably giving options of 20-30% down payment, (70-80% LTV), and many of them do loans/invest in non owner occupied spaces. Interest rates in these spaces range on what kind of FICO score a borrower has, where it is located, and a variety of other factors.
Maybe I can give you some insight on how I can help if you are interested! Send me a PM!
- Real Estate Agent · Chicago, IL · Member since 2018 · 1k+ posts · 1k+ votes3y
Quote from @Michael Modugno:
Does anyone have experience in investing in single family homes? I currently own a duplex and for me to buy another property I need a low down payment. The option my lender is giving me is a owner occupied loan at 5% for a single family home. Please give me constructive advice on investing in single family homes.
5% down to buy a single family home as an owner occupant is pretty typical. Sometimes you can put down as little as 3% for conventional and otherwise you could do FHA for 3.5% down however I recommend saving that to house hack 2-4 unit properties.
- Contractor · Scottsdale, AZ · Member since 2010 · 2k+ posts · 3k+ votes3y
The upside on single family homes: They tend to appreciate at a much faster pace than small multifamily, condos, townhomes, etc.
The downside on single family homes: You're going to have a really hard time finding one that cash flows right now with high interest rates (especially when you're only putting 5% down)
- Member since 2021 · 15 posts · 8 votes3yGreat thanks! I'm trying to buy 5 properties in 5 years and will only be able to put down around 15k-30k max each time. Would another option be to look for homes under 200k and use 15% conventional loan down payments?
Quote from @Paul De Luca:
Quote from @Michael Modugno:
Does anyone have experience in investing in single family homes? I currently own a duplex and for me to buy another property I need a low down payment. The option my lender is giving me is a owner occupied loan at 5% for a single family home. Please give me constructive advice on investing in single family homes.
5% down to buy a single family home as an owner occupant is pretty typical. Sometimes you can put down as little as 3% for conventional and otherwise you could do FHA for 3.5% down however I recommend saving that to house hack 2-4 unit properties.
- Investor · Austin, TX · Member since 2021 · 9k+ posts · 5k+ votes3y
Single family is great, but not as scalable as commercial property such as storage units and multifamily. Having 100 single family homes vs having a 100 unit apartment is worlds apart
- Real Estate Agent · Chicago, IL · Member since 2018 · 1k+ posts · 1k+ votes3y
Quote from @Michael Modugno:
Great thanks! I'm trying to buy 5 properties in 5 years and will only be able to put down around 15k-30k max each time. Would another option be to look for homes under 200k and use 15% conventional loan down payments?Quote from @Paul De Luca:
Quote from @Michael Modugno:
Does anyone have experience in investing in single family homes? I currently own a duplex and for me to buy another property I need a low down payment. The option my lender is giving me is a owner occupied loan at 5% for a single family home. Please give me constructive advice on investing in single family homes.
5% down to buy a single family home as an owner occupant is pretty typical. Sometimes you can put down as little as 3% for conventional and otherwise you could do FHA for 3.5% down however I recommend saving that to house hack 2-4 unit properties.
You could do that, but it will deplete more of your cash. If you're planning on buying 5 homes in 5 years you could just owner occupy each home for a lower down payment, live there for a year & fix up, move out & rent it out. Your DTI could become a problem though, depending on your income.
I would recommend owner occupying a 2-4 unit property over a SFH though. You can get some low down payment loans for that.
- 3yJaron WallingPro MemberRental Property Investor · Indianapolis, IN · Member since 2018 · 4k+ posts · 4k+ votes
@Michael Modugno I agree with the above responses BUT... my local lender requires 25% down on the next house if you're holding the previous primary and renting it out. The new property is considered an investment property. Idk if your lender treats it the same way but that's our experience.
I try to avoid this a buy distressed properties with cash and finance out doing BRRR'ish deals. Basically the value add strategy bridges the down payment gap. We're adding $30-35K in value on a SFH. It's slow growth but the properties cash-flow and the journey goes on.
- Real Estate Broker · Glenview, IL · Member since 2022 · 7 posts · 6 votes3y
Hi @Michael Modugno. You asked specifically for advice on investing in single family homes and needing a low down payment. Many of the things to consider will revolve around your ability to get loans for this and the next homes. Yes, as your lender mentioned, there are low down payment options available for owner occupied homes. If you are trying to further decrease your initial cash outlay, you might try to pursue a closing cost credit from the seller as part of your offer where you ask the seller to kick in a certain amount of money at closing to reduce your closing costs and thus some of your initial out of pocket cash spend. The amount you are allowed to receive will be dictated by your loan so definitely ask your lender how much you can get and what you can use it on and for what closing costs. It needs to be used on specific closing costs and you don't get to keep whatever you don't use on closing costs so don't try to ask for more than you can use.
You'll want to get something in financeable condition but likely something you can add value to in order to maximize what you can rent it for. So if it's missing a kitchen, a furnace and someone broke in and stole all the copper pipes before it hit the market, lender might not be able to get you that 5% down loan on it.
@Paul De Luca touched on DTI potentially becoming a problem as you try to scale. You definitely want to keep an eye on that. DTI is your personal DEBT to Income. Say you qualify with your normal job's income for the loan to get this 1st house, you then go rent it out and try to buy another property. On your way to get a loan to buy your next house, house 2, the lender will look at your income to see if you can afford the payment on house 1 AND house 2. The lender may be able to use some of the rental income from house 1 to offset the costs of that house, but often I find they will only use 75% of the actual rental income or whatever the market rent is for that area. So for simplicity let's say you buy a $200,000 house and rent the house out for 1% of that at a monthly rate of $2,000. If you put 5% down and get a mortgage rate around 7.25%, taxes at $4,500, mortgage insurance of say $120/mo(mortgage insurance/PMI, if you don't put 20% down, this cost can vary based on your credit score and actual $ down payment) and homeowners insurance of $100/mo, that gets you a payment around $1,900. If you are charging $2,000/mo for rent and the lender is only willing to consider 75% of that $2,000 rent, then $2000 x 75%= $1,500. So the lender can use $1,500 of House 1's income to offset the $1,900 House 1 payment meaning your regular income needs to be able to cover the payment on that $1900-1500=$400/mo plus the cost of the new mortgage for house 2 AND since you mentioned you owned a duplex, you need to calculate the same income and expense calculations we did above to figure out how much you qualify for in terms of a mortgage. Ask a lender how long you need to rent the property for in order to use the rental income it generates, or if it's not rented yet if they can use an estimate for market rents. The lender might allow 45% of your total income to be used to offset debt and the new mortgage. A great lender can help you calculate and understand your numbers and also guide you on how to improve your DTI by doing things like working to pay down other debt, car payments, etc.
I am not a lender, if your current lender isn't helping you understand all this and how it will impact your ability to buy the next several homes, then find a strong lender that will take the time to help you. I am a Realtor in Chicago's Northwest suburbs. If you want a great local lender who can walk and talk you through all these details and help you understand what it's going to take, let me know and I can get you contact info for one I have many of my buyer clients use.
The other question you will NEED to be more familiar with is how much in 'reserves' your lender will require for each property you hold. So if you are bootstrapping just to save a down payment, but don't have other money available to you for reserves, then you might not qualify for the next loan. The reserves amount will vary so talk to your lender. They want to see that you have access to money should something go wrong, a tenant stops paying, etc. and may say you need to show 2 months of reserves for each property you own, sometimes they may consider a portion of 401k savings as a potential reserves. Again a great lender will cover this with you so you can plan ahead.
As you may have noticed in the above rent calculations, the income and expense numbers were extremely tight. So it will take patience and effort to find a property that works out on the numbers. You can play with a mortgage calculator online to figure out how all those numbers work if say you get that house for much less $ and add some sweat equity to get it to rent out. Remember your goal is investing, not just to pick up 5 homes in 5 years. The numbers need to make sense and the house either needs to make you money now, or be in an area you strongly feel will appreciate in value from where it is today. Don't forget to plan for future repair expenses, vacancy, and be realistic on what you can rent a place out for. That 30 year old roof and 50 year old furnace won't care if you can afford replacing it or not. If you are just breaking even on the homes you are buying, you will find yourself spending your regular income just to keep the maintenance up on the homes. The cost of a roof on a 3 story apartment building might not be that much different than the cost of single family ranch home with a similar footprint, but the 3 story may generate more income from 3 apartments for you after expenses than a single family home generating having 1 renter monthly. Plenty of people invest in single family homes, if that is what you've decided to focus your investing on then you really want to get comfortable with the numbers and costs so you can plan accordingly and put yourself in the position to be able to buy the future homes. Does that help?
- Member since 2021 · 15 posts · 8 votes3y
okay great! Yeah owner occupy sounds like the best strategy as I don't have that much money to spend at the moment. I would like to get another 2-4 units, but ive tried 3 lenders and cant qualify.
- Member since 2021 · 15 posts · 8 votes3yPaul thank you for the generous reply! I would definitely like to talk to your lender and yourself more to get some guided direction!
Quote from @Paul Cionczyk:
Hi @Michael Modugno. You asked specifically for advice on investing in single family homes and needing a low down payment. Many of the things to consider will revolve around your ability to get loans for this and the next homes. Yes, as your lender mentioned, there are low down payment options available for owner occupied homes. If you are trying to further decrease your initial cash outlay, you might try to pursue a closing cost credit from the seller as part of your offer where you ask the seller to kick in a certain amount of money at closing to reduce your closing costs and thus some of your initial out of pocket cash spend. The amount you are allowed to receive will be dictated by your loan so definitely ask your lender how much you can get and what you can use it on and for what closing costs. It needs to be used on specific closing costs and you don't get to keep whatever you don't use on closing costs so don't try to ask for more than you can use.
You'll want to get something in financeable condition but likely something you can add value to in order to maximize what you can rent it for. So if it's missing a kitchen, a furnace and someone broke in and stole all the copper pipes before it hit the market, lender might not be able to get you that 5% down loan on it.
@Paul De Luca touched on DTI potentially becoming a problem as you try to scale. You definitely want to keep an eye on that. DTI is your personal DEBT to Income. Say you qualify with your normal job's income for the loan to get this 1st house, you then go rent it out and try to buy another property. On your way to get a loan to buy your next house, house 2, the lender will look at your income to see if you can afford the payment on house 1 AND house 2. The lender may be able to use some of the rental income from house 1 to offset the costs of that house, but often I find they will only use 75% of the actual rental income or whatever the market rent is for that area. So for simplicity let's say you buy a $200,000 house and rent the house out for 1% of that at a monthly rate of $2,000. If you put 5% down and get a mortgage rate around 7.25%, taxes at $4,500, mortgage insurance of say $120/mo(mortgage insurance/PMI, if you don't put 20% down, this cost can vary based on your credit score and actual $ down payment) and homeowners insurance of $100/mo, that gets you a payment around $1,900. If you are charging $2,000/mo for rent and the lender is only willing to consider 75% of that $2,000 rent, then $2000 x 75%= $1,500. So the lender can use $1,500 of House 1's income to offset the $1,900 House 1 payment meaning your regular income needs to be able to cover the payment on that $1900-1500=$400/mo plus the cost of the new mortgage for house 2 AND since you mentioned you owned a duplex, you need to calculate the same income and expense calculations we did above to figure out how much you qualify for in terms of a mortgage. Ask a lender how long you need to rent the property for in order to use the rental income it generates, or if it's not rented yet if they can use an estimate for market rents. The lender might allow 45% of your total income to be used to offset debt and the new mortgage. A great lender can help you calculate and understand your numbers and also guide you on how to improve your DTI by doing things like working to pay down other debt, car payments, etc.
I am not a lender, if your current lender isn't helping you understand all this and how it will impact your ability to buy the next several homes, then find a strong lender that will take the time to help you. I am a Realtor in Chicago's Northwest suburbs. If you want a great local lender who can walk and talk you through all these details and help you understand what it's going to take, let me know and I can get you contact info for one I have many of my buyer clients use.
The other question you will NEED to be more familiar with is how much in 'reserves' your lender will require for each property you hold. So if you are bootstrapping just to save a down payment, but don't have other money available to you for reserves, then you might not qualify for the next loan. The reserves amount will vary so talk to your lender. They want to see that you have access to money should something go wrong, a tenant stops paying, etc. and may say you need to show 2 months of reserves for each property you own, sometimes they may consider a portion of 401k savings as a potential reserves. Again a great lender will cover this with you so you can plan ahead.
As you may have noticed in the above rent calculations, the income and expense numbers were extremely tight. So it will take patience and effort to find a property that works out on the numbers. You can play with a mortgage calculator online to figure out how all those numbers work if say you get that house for much less $ and add some sweat equity to get it to rent out. Remember your goal is investing, not just to pick up 5 homes in 5 years. The numbers need to make sense and the house either needs to make you money now, or be in an area you strongly feel will appreciate in value from where it is today. Don't forget to plan for future repair expenses, vacancy, and be realistic on what you can rent a place out for. That 30 year old roof and 50 year old furnace won't care if you can afford replacing it or not. If you are just breaking even on the homes you are buying, you will find yourself spending your regular income just to keep the maintenance up on the homes. The cost of a roof on a 3 story apartment building might not be that much different than the cost of single family ranch home with a similar footprint, but the 3 story may generate more income from 3 apartments for you after expenses than a single family home generating having 1 renter monthly. Plenty of people invest in single family homes, if that is what you've decided to focus your investing on then you really want to get comfortable with the numbers and costs so you can plan accordingly and put yourself in the position to be able to buy the future homes. Does that help?
- Member since 2021 · 15 posts · 8 votes3y
Quote from @Eliott Elias:
Single family is great, but not as scalable as commercial property such as storage units and multifamily. Having 100 single family homes vs having a 100 unit apartment is worlds apart
What would you suggest starting from if you don't have a lot of money? Saving up more money over the years and scale slowly with 2 to 4 units and then sell eventually to buy something bigger?
- Real Estate Agent · Member since 2019 · 569 posts · 257 votes3y
Quote from @Michael Modugno:
Does anyone have experience in investing in single family homes? I currently own a duplex and for me to buy another property I need a low down payment. The option my lender is giving me is a owner occupied loan at 5% for a single family home. Please give me constructive advice on investing in single family homes.
I don't like to limit myself by property type but the opportunity present unless you are trying to build a specific portfolio to sell to a REIT in the future. You could perhaps try seller financing/ subject to see if the numbers will work. I am seeing that the older homes needing renovation are cash flowing and more negotiable than a turn key product.
- Rental Property Investor · Centreville, VA · Member since 2019 · 1k+ posts · 799 votes3y
Hi Michael, I have found value investing in Cleveland, OH because it is home to Cleveland Clinic, lot of good neighborhoods, landlord friendly laws, stable appreciation and good cash flowing properties. There are also abundant opportunities for small multi family and SFH. I have been able to scale up to 12 doors in 2 years so definitely recommend this area. Feel free to reach out and we can discuss
- Member since 2021 · 15 posts · 8 votes3y
Quote from @Ricardo Hidalgo:
Quote from @Michael Modugno:
Does anyone have experience in investing in single family homes? I currently own a duplex and for me to buy another property I need a low down payment. The option my lender is giving me is a owner occupied loan at 5% for a single family home. Please give me constructive advice on investing in single family homes.
I don't like to limit myself by property type but the opportunity present unless you are trying to build a specific portfolio to sell to a REIT in the future. You could perhaps try seller financing/ subject to see if the numbers will work. I am seeing that the older homes needing renovation are cash flowing and more negotiable than a turn key product.
Great thanks! Yeah my goal would be to continually grow a real estate portfolio so whatever makes the most sense for me to keep growing is what I really want!
- 3yPatrick DruryBusiness MemberReal Estate Agent · Columbus, OH & Cleveland OH · Member since 2021 · 1k+ posts · 2k+ votes
@Michael Modugno
Better off saving up and getting an owner-occupant duplex. Owner occupying a single family is a pretty bad investment strategy in my opinion. It will run 100% negative till you move out and rent it out. If you want to buy single families, wait till you have 15-20% and buy something cheaper with the ability to cashflow. - Member since 2021 · 15 posts · 8 votes3y
I currently have an owner occupied duplex under an FHA loan. I would like to keep growing my portfolio. Would it be smart until I have an LTV under 80% so I can refinance and get another duplex under an FHA loan in a few years?
- 3yV.G JasonPro MemberInvestor · Member since 2022 · 3k+ posts · 3k+ votes
Quote from @Michael Modugno:
Great thanks! I'm trying to buy 5 properties in 5 years and will only be able to put down around 15k-30k max each time. Would another option be to look for homes under 200k and use 15% conventional loan down payments?Quote from @Paul De Luca:
Quote from @Michael Modugno:
Does anyone have experience in investing in single family homes? I currently own a duplex and for me to buy another property I need a low down payment. The option my lender is giving me is a owner occupied loan at 5% for a single family home. Please give me constructive advice on investing in single family homes.
5% down to buy a single family home as an owner occupant is pretty typical. Sometimes you can put down as little as 3% for conventional and otherwise you could do FHA for 3.5% down however I recommend saving that to house hack 2-4 unit properties.
Very similar situation, great dialogue. Is this 5 in a 5 a stuck rule, or are you nimble if opportunities take you elsewhere? I ask cause I notice I get fixated on such things, but realize it's not worth it always.
- 3yJay ThomasPro MemberReal Estate Agent · Houston, TX · Member since 2021 · 1k+ posts · 715 votes
Commercial real estate has a much higher potential for return than single family properties, making it an attractive option for those looking to maximize their investments. Storage units and multifamily properties are two of the most common types of commercial real estate, and both offer the opportunity for investors to earn returns that are significantly higher than those from single family homes. With storage units, investors can purchase the unit and then rent it out to tenants, while with multifamily properties they can purchase the entire building and rent out individual units.
- Member since 2022 · 1k+ posts · 1k+ votes3yThis sounds good to me. Especially since Chicago has such outrageous property taxes, it's hard to justify a sfr purchase. Seems many people want out, and the appreciation/value suffers. Go at least a duplex if youre investing.
Quote from @Paul De Luca:
Quote from @Michael Modugno:
Does anyone have experience in investing in single family homes? I currently own a duplex and for me to buy another property I need a low down payment. The option my lender is giving me is a owner occupied loan at 5% for a single family home. Please give me constructive advice on investing in single family homes.
5% down to buy a single family home as an owner occupant is pretty typical. Sometimes you can put down as little as 3% for conventional and otherwise you could do FHA for 3.5% down however I recommend saving that to house hack 2-4 unit properties.
- Real Estate Broker · 3412 S. Harlem Avenue Riverside, IL 60546 · Member since 2015 · 6k+ posts · 5k+ votes3y
@Michael Modugno the thing no one has mentioned yet is the idea of selling some of these properties along the way. If you live a 1-4 unit property for two out of the last fie years, then you can sell tax free. I never got a chance to formally house hack a 2-4 unit building since I had kids already when I became interested, but I have successfully done two live in flips. If you sell property number 1 in year 3 to help you buy a much larger/better cash flowing property in year 3 then you can see some very solid net worth gains.
You also can cash out refinance your properties or pull home equity lines of credit. So many investors think they personally have to save up every penny for down payments on new properties, but there are a lot of ways to keep rolling once you get started. Find a great lender and lean on them for advice. I personally was super lucky to meet @Joshua Jones early on. He has helped me with eight residential loans over the years personally, but more importantly he has helped me formulate my strategy.
- 3yJoshua JonesPro MemberMember since 2020 · 70 posts · 32 votes
Thank you @John Warren. @Michael Modugno, john is correct when it comes to investing. There are a lot of different ways to look at this. Can we leverage our current home? Can we leverage other assets we have? The idea is to keep as much cash in your pocket as you can. The reason is that you are looking to build a portfolio. When you buy rental real estate, or real estate that will eventually become rental, remember that the tenants are the ones paying down your debt. Marry the property, date the rate. It's about acquisition. Getting the first one is easy. It's how do we organically grow to the next one or more.
Too many times us lenders we look only at one avenue. But working with a good team, a team of investors, is the way to help you grow. Learn from your team.
- Member since 2021 · 15 posts · 8 votes3y
Quote from @John Warren:
@Michael Modugno the thing no one has mentioned yet is the idea of selling some of these properties along the way. If you live a 1-4 unit property for two out of the last fie years, then you can sell tax free. I never got a chance to formally house hack a 2-4 unit building since I had kids already when I became interested, but I have successfully done two live in flips. If you sell property number 1 in year 3 to help you buy a much larger/better cash flowing property in year 3 then you can see some very solid net worth gains.
You also can cash out refinance your properties or pull home equity lines of credit. So many investors think they personally have to save up every penny for down payments on new properties, but there are a lot of ways to keep rolling once you get started. Find a great lender and lean on them for advice. I personally was super lucky to meet @Joshua Jones early on. He has helped me with eight residential loans over the years personally, but more importantly he has helped me formulate my strategy.
Great thanks so much for the advise! This is what I was looking for!
- Member since 2021 · 15 posts · 8 votes3y
Quote from @Joshua Jones:
Thank you @John Warren. @Michael Modugno, john is correct when it comes to investing. There are a lot of different ways to look at this. Can we leverage our current home? Can we leverage other assets we have? The idea is to keep as much cash in your pocket as you can. The reason is that you are looking to build a portfolio. When you buy rental real estate, or real estate that will eventually become rental, remember that the tenants are the ones paying down your debt. Marry the property, date the rate. It's about acquisition. Getting the first one is easy. It's how do we organically grow to the next one or more.
Too many times us lenders we look only at one avenue. But working with a good team, a team of investors, is the way to help you grow. Learn from your team.
@Joshua Jones Thanks for the reply! I sent you a PM.
- Member since 2021 · 15 posts · 8 votes3y
Quote from @V.G Jason:
Quote from @Michael Modugno:
Great thanks! I'm trying to buy 5 properties in 5 years and will only be able to put down around 15k-30k max each time. Would another option be to look for homes under 200k and use 15% conventional loan down payments?Quote from @Paul De Luca:
Quote from @Michael Modugno:
Does anyone have experience in investing in single family homes? I currently own a duplex and for me to buy another property I need a low down payment. The option my lender is giving me is a owner occupied loan at 5% for a single family home. Please give me constructive advice on investing in single family homes.
5% down to buy a single family home as an owner occupant is pretty typical. Sometimes you can put down as little as 3% for conventional and otherwise you could do FHA for 3.5% down however I recommend saving that to house hack 2-4 unit properties.
Very similar situation, great dialogue. Is this 5 in a 5 a stuck rule, or are you nimble if opportunities take you elsewhere? I ask cause I notice I get fixated on such things, but realize it's not worth it always.
- Member since 2021 · 15 posts · 8 votes3y
Quote from @V.G Jason:
Quote from @Michael Modugno:
Great thanks! I'm trying to buy 5 properties in 5 years and will only be able to put down around 15k-30k max each time. Would another option be to look for homes under 200k and use 15% conventional loan down payments?Quote from @Paul De Luca:
Quote from @Michael Modugno:
Does anyone have experience in investing in single family homes? I currently own a duplex and for me to buy another property I need a low down payment. The option my lender is giving me is a owner occupied loan at 5% for a single family home. Please give me constructive advice on investing in single family homes.
5% down to buy a single family home as an owner occupant is pretty typical. Sometimes you can put down as little as 3% for conventional and otherwise you could do FHA for 3.5% down however I recommend saving that to house hack 2-4 unit properties.
Very similar situation, great dialogue. Is this 5 in a 5 a stuck rule, or are you nimble if opportunities take you elsewhere? I ask cause I notice I get fixated on such things, but realize it's not worth it always.
Im open to other ideas! I just want to keep growing at a consistent rate and have a plan. Giving myself a number pushes me to figure out options faster.
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