Single Family Home Investing: An In-Depth Look at the Pros & Cons

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Greetings, fellow investors! Today we are going to talk about single family homes as buy and hold investments. We got started with SFHs and still own some today. We also own small multi-families, apartment buildings, mixed use and office spaces, so I have gotten to know the things that make SFHs a great investment and areas where they can fall short.

I will talk out of both sides of my mouth for a moment. There is simply no better investment from a cash flow perspective than a single family home, bought at the right price, with a solid long term tenant who pays their rent on time. And there is no worse of a suck-hole than a single family home that is sitting vacant with damage done by the tenant who far exceeds their security deposit — as well as a leaky roof and a broken furnace.

Investments in SFHs are not bad and should not be viewed that way. Nor should they be the end all be all to wealth building. There are, however, ways that they shine as investments and ways that they can miss the mark. In this article, I am going to go over the pros and cons of SFH investments.

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Single Family Home Pros

Pro #1: Expenses

In my estimation the thing that makes SFHs so great is that when the property is leased, the expenses are low and predictable. Tenants typically pay all utilities, including water. If your lease agreement is structured well, the tenant will be responsible for the landscaping and the snow removal. There are no common areas to clean as you would have in a multi-family. And if your tenant are really great, they will do some minor repairs themselves without you even knowing about it. As long as there are no major maintenance issues, your only out-of-pocket expenses will be debt service, real estate tax, insurance, and management.

Related: Single Family vs. Multifamily: Which is the Better Investment?

Pro #2: Tenants

Not all tenants pay their rent on time, and of course, not all tenants take good care of their rentals. That being said, I have seen more tenants treat their rented house like a home than those who are renting an apartment. They put up lights on the house at Christmas, they cut the grass, and one even paid to have some of the windows replaced. You would think they owned the house themselves the way they treat it. I have SFH tenants who have been in place for many years, and will stay in the house for as long as we let them stay. As long as we don’t increase the rent beyond their means and take care of a repair when it’s needed, they will stay forever.

Pro #3: Market Comparisons

So, I know that this is a hotly debated topic among real estate investors. Apartment buildings are valued on cap rate, which is determined by looking at the Net Operating Income. If you increase your rents or reduce expenses, your NOI goes up, so your value goes up too based on the same cap rate. I know the story. The other side of that conversation is that apartment buildings will only be compared to other apartment buildings. The acceptable cap rate for the market will be what it is and will stay that way until the market changes.

The one investment that is a bit of a chameleon is the single family home. It can be compared to other SFH investments and should be when you are evaluating a purchase. But because it’s still a single family home, it can also be compared to homes that people live in, which can really affect value if the home ownership market changes in your area. This phenomenon is true only in A and B class neighborhoods, from what I’ve seen.

A and B class neighborhoods have a low concentration of rentals overall, so you have plenty of comps to pull up the value of your rental when the home buyer market gets hot. C and D class areas are primarily landlord owned, so there the homes owned by the occupants will have around the same value as the ones owned by a landlord. In a nutshell, you can buy at an investor price and sell at a home owner price when the market is right.

Single Family Home Cons

Con #1: Vacancy

As I alluded to in the beginning, a SFH can turn on you on a dime when the tenant moves out. In New Jersey, where I invest, you can only charge 1.5 month’s rent in security deposit on any residential unit. That is the case in most states as well. If the tenant leaves you with any rent owed, there is very little money left to get the property rent ready again. This money can get sucked out very quickly if you need repainting, carpet, or other touch ups to get the house rent ready again. And if the tenant left you a ,mess behind as mine have in the past, it can cost you dearly to get the unit turned around.

The second way that vacancies sting on a SFH is that there is only one rent source. Once that source is gone, the property is financially “upside down,” meaning that you have to support the expenses out of your pocket until you have another viable tenant in place. Multi-family doesn’t work that way. You can lose one or even a few tenants in a small multi and not even blink.

Con #2: Personal Guarantees

Financing on SFHs can get interesting, which is why some would put a mark for them in the “Pro” column. You can get owners to hold a mortgage easily on a SFH, and you can get really creative with low money down strategies. That being said, you most always will have to personally guarantee the mortgage with a bank or private lender on a SFH. The reason is that it’s very hard for a lender to be comfortable with the asset being enough collateral for their loan. There are too many “what ifs” that could come up. You only see the PG get removed on much larger deals, where the main value is in the property, not the other holdings of the guarantor.

Having too many personal guarantees out there can slow down your growth over time, as you should be disclosing those to lenders as “contingent liabilities.” Banks don’t want to see too many of these, as it dilutes the value of a PG to them. Bottom line, there is only so much personal guaranteeing you can do, so be careful!

Related: Multiplexes vs. Single Family Rentals: Which is the Better Rental Property?

Con #3: Capital Expenses

This is the one that comes back around and bites some investors in the butt. For any real estate rental, you should be budgeting and setting aside cash each year for major capital expenses. These are anything that are not regular maintenance items and can include roof repair or replacement, heater repair or replacement, windows, kitchen and bath upgrades, and even carpeting. The list goes on and on. These items cost big money.

On a SFH that cash flows $300 to $400 per month, a $5,000 roof replacement can knock you out of the box. What makes SFHs difficult is that you only have one unit to contribute to that capital expense budget. If a major repair hits before you have time to set aside some cash, you will be going into your own pocket to keep things moving. Multi-families are different. You have a few units that can kick towards the cap ex budget, and things like roof replacements will typically be less per unit than a single family home in comparison.

In conclusion, SFHs are a double edged sword. With the right planning and implementation, you can do very well with them. Just be sure to think about the long term before you buy. How will this investment affect your ability to finance more deals in the future? Are you able to set aside some “rainy day” money for big expenses and potential tenant move outs?

Do you see more pros or more cons when it comes to single family home investing? What would you add to my list?

Be sure to leave a comment, and let’s start a discussion!

About Author

Matt Faircloth

In 2005, Matt founded The DeRosa Group along with his wife, Elizabeth. At the time, the two person company owned and managed two assets – a single family home and a duplex. Over the last nine years, they have grown the company to a 12 person team owning and managing over five million dollars in residential and commercial assets throughout the central NJ and Philadelphia area. One of DeRosa’s mantras is “to make money while making a difference.”

17 Comments

  1. Andrew Syrios

    Good article! I would note a few other advantages and disadvantages too. For example, it’s harder to force appreciation with houses whereas with apartments, if you do a value add, it increases the NOI and thereby it’s valued higher. But houses are always valued on the comps. However, houses are more diversified, you’re not putting all your eggs (or a large number of them) in one basket. But at the same time they are more spread out. It’s a give and take sort of thing.

    • Matt Faircloth

      Hey Andrew,

      Thanks for reading and the comment! I agree with you on forced appreciation, it’s a benefit for multi families. SFH’s in A and B neighborhoods do benefit from the rise in home owner grade properties though, so perhaps it’s a wash. There is no right way, there are just pros and cons for both, a give and take as you said.
      Take care,
      Matt

  2. Bolawa Fadoju

    Awesome article.

    I think using SFH’s , with good cash flow, could be a good starting point for first time investors. In all investment arenas diversification is key, so I think having a mix of both SFHs and MFHs is beneficial long term, as opposed to concentrating on one or the other. At the end of the day I guess it depends on what works for one as well.

    • Matt Faircloth

      Hey Bolawa,

      Yes, SFH’s are where most investors start – they were my first investments also! They are easy to manage, you can buy with not that much money down, and the list goes on. Most investors graduate from them at some point, if they choose to be in the business full time.
      I’m glad you enjoyed. Thanks!
      Matt

  3. Jeff Cooley

    I think the key is to make good deals from the onset and then you will be much more comfortable should Mr cap X come looking for trouble ! You can bet he will from time to time ! JUST BE CALM AND LOOK AT IT AS A WAY TO OVERCOME ONE OF MANY OBSTACLES IN REAL ESTATE. IF YOU SET YOUR MIND RIGHT IT CAN EVEN BE A FUN WAY TO CHALLENGE YOURSELF AND SEE HOW YOU MEASURE UP IN THE FACE OF ADVERSITY

  4. David Tilney

    If the comparison is made between owning multiple single family units and multi-family units then the comparative costs are at least 10% lower for the single family units. As you implied, the single family units come complete with an on-site resident manager (tenant) who will maintain much of both the interior and exterior if your expectations are shared and your screening process is effective. Multi-family properties require you to provide services which are not needed for single family houses. Jack Miller (deceased) used to refer to single family houses as “horizontal apartments.” A disruptive tenant can empty a multi-tenant building quickly where as he can not impact your other tenants if he lived in one of your single family houses.

    • Matt Faircloth

      Hey David,
      Those are really good points, and I love the “resident manager” analogy, LOL. Also a good point on unruly tenants in a multi disrupting the others. I have seen that in my buildings in the past unfortunately! That being said I get those tenants out quickly. Unruly tenants in SFH’s cause problems too, the problem is that I don’t hear about it until things are way out of control, and they have wreaked havoc on the entire property!
      Matt

  5. David duCille

    Love my SFH rentals! Unfortunately in Tampa there is very limited opportunity to buy multifamily units due to the types of construction and generally the ones that do exist are really in D or F neighborhoods. But SFH are plentiful and priced pretty darn good with lots of room for appreciation right now if you are buying them in good neighborhoods. The only thing that stinks is needing to get a mortgage for each one. I’d love to buy a triplex for 300k with one mortgage instead of having 3 100k SFH with their own mortgages. but they are all cash flowing great so it’s really not a big deal to me! If I have vacancy in one, the other 2 cash flow plenty to cover it so its still like having a multifamily. What I don’t like is worrying about the security of the property if its vacant. IF you have SFH in bad areas and they go vacant, be prepared to stay in them yourself until they get rented

  6. Colin Smith

    Great article! I would also say that as long as you are putting a little bit aside each month out of the rent for vacancies, then vacancies shouldn’t be too hard deal with as long as there is a quick turn around time. Overall I think they make for a great investment!

  7. Jiri Vetyska

    There is also one advantage to SFRs that multi-family doesn’t have, and I really like.
    You are buying a SRF as investment, that is for discount, but later you are selling it at market value, ideally when the RE market is hot. This of course can produce a lot of value and if you plan it right for this exit strategy, save you ton of money on cap ex for example.
    So that new roof is needed? It doesn’t have to be an expense, it can be an investment, that will increase the resale value, because everyone wants new roof. For example you don’t need tons of money up front to fix everything on the property, and let the rent help you save up for major repairs later. Great way to get started in wealth creation.

  8. Lisa DuFaux

    To expand on Chad’s comment, I like single family because of the additional exit strategy. If you need to sell a multi-family, your buyer pool is pretty much limited to investors. If you want to raise some cash by selling a single family rental, you can also sell to owner occupants…much larger buyer population.

  9. Luka Milicevic

    Good post, Matt. I like all the comparisons you made to the pros and cons. I think some of the cons also apply to multi-families and are not unique to single families only.

    I will say the tenant applicants I’ve had for SF tend to be families that take pride in the properties they live in. I think they will take better care of your property than someone who is living in an apartment.

    On the vacancy con: If you have a 4plex and you lose one tenant you are still 75% rented, where as on a SF if you lose one tenant you are 0% rented. HOWEVER, you need 4 tenants to be 100% rented in a 4plex vs 1 tenant to be 100% rented in a SF. I think it is just a play on words and it all depends how you look at it.

    I personally like SF for the fact that most tenants will be families that take pride in the property and they have decent cash flow. I do, however; prefer multi family units 🙂

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