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

by | BiggerPockets.com

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:

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!

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!

About Author

Paul Moore

Paul is author of The Perfect Investment - Create Enduring Wealth from the Historic Shift to Multifamily Housing, leads Wellings Capital , a multifamily investment firm, and hosts the How to Lose Money podcast. Paul was 2-time Finalist for MI Entrepreneur of the Year, has flipped 60 homes and 30 waterfront lots, developed a subdivision, and appeared on HGTV. Paul's firm invests heavily to fight human trafficking and rescue its victims.

28 Comments

  1. Christopher Smith

    I’ve been doing SFRs since 2010-11. It’s been great so far, rental income and underlying appreciation. Of course I bought at the depth of the housing crises primarily in bedroom communities of Silicon Valley so that helped enormously.

    Multis in my neck of the woods is just about a non starter. Huge money inflows from overseas investors have driven cap rates to nil. These folks don’t even care if they make money they just need a place to park their money outside the grasp of their home country’s jurisdiction. Many Multis here are simply total duds.

    There is now overseas money going into SFRs as well, but at this point SFR values have all at least doubled in the last 5 or 6 years (while rents are up only about 40 percent) so SFRs are no longer viable here anymore on an acceptable cash flow basis.

    BTW – I have solid Mgmt Co’s doing the grunt work for all my SFRs in all locations, would not have it any other way.

    Also looking for solid Multi Opportunities in the Midwest, but nothing acceptable so far, so I have added a couple of Midwest SFRs recently to fill the gaps.

    • CHRISTOPHER SMITH – Ditto my experience here in SW Fla (SWFL). Tremendous capital appreciation and rental increases. I have a couple of duplexes and number of SFR bought starting 2011 near the bottom of the housing market collapse. All but one duplex professionally managed.
      No disrespect PAUL MOORE, but your “Warning: Your Single Family Rental Portfolio Might Just Be a House of Cards” was published about 10 years too late. 🙂
      The housing market collapse was a “once-in-a-lifetime” event.
      And the next dip? About a “generation” (20-25 years) from the last, or about 2028+. (It takes a generation to forget the mistakes of the past.)

      • Paul Moore

        Clark, Likewise, Congrats on having the courage to get into your market at just the right time. I did market timing about 4 times, and won big on 2… but lost big on the others. I don’t know if I agree that it was once in a lifetime, but I really hope that you are right. You may be!

  2. Jade S.

    Paul, you make some compelling arguments about the “stickiness” of MF rents and occupancies during the Great Recession, as well as the carnage that many of those SFH investors saw in FL. I also have a small portfolio of SFH and have myself begun to move into commercial assets to diversify. But in your examples, you primarily highlighted the FL market space and how it was terribly overbuilt. And no doubt NV and AZ saw hard hits too. My first question is have you seen data that reflected the same scenario in most markets in the Recession? Also, given the extremely conservative approach builders appear to have taken in recent years, are we being too concerned with the “recently effect” with regards to those specific markets? Thanks for the thought provoking post, and I couldn’t agree more on property management!

    • Paul Moore

      Thanks for your comments, Jade. All real estate is local, and while I think the worst effects of the recession were in FL, CA, AZ and NV, other markets were obviously hit hard as well. I don’t have data proving that out, but it is certainly attainable. We do a 24-point market screen when looking for multifamily markets to invest in, and one of the big issues is “how does this market perform during a recession?” Or at least in the big one! Thanks for your comments.

  3. Ryan E.

    I feel like the assumption here (and all over the forums for that matter) is that the next recession will be as big as the last one. Wasn’t the Great Financial Crisis a “once in a generation” event? Isn’t it more likely that the next recession will be much less drastic?

    • Paul Moore

      Ryan, Yes, I think you are right about that. I hope so. I was just telling my son that people have been predicting doomsday level crashes since I was a kid in the 60s, and undoubtedly for centuries before that. (Take the year 999 for example.) But the big ones don’t hit that often. Thanks!

  4. David Krulac

    Paul, insightful, interesting article.

    I’ve invested in apartments as well as SFH through several recessions. Btw I’ve bought and sold over 900 properties for my own personal inventory; and during the last recession, the big one in 2008, I didn’t lose any tenants, and I didn’t reduce anybody’s rent, and didn’t have any prolonged vacancy either. I have had several tenants who have rented from me for over 30 years. One 30 year tenant told me that the only way they’re leaving is horizontal.

    Before 2008, I thought the worst time was 1981/1982 when interest rates were 16% – 18% fixed. Bought a place and signed the contract agreeing to pay a mortgage for 30 years fixed at 16% interest, and was overjoyed to settle with 15%. I thought that was bad until 2008.

    I’ve bought and sold as many 74 properties while having a full time non-real estate job. I buy property every year even during the recession. There are a lot less competition when you buy during a recession. I want positive cashflow and have bought some properties over 3% rule, though that doesn’t happen every day. I sold some apartment buildings that I owned for 37 years, ironically the owner before me also owned the property for 37 years. I told the group that bought, that I thought that was an indicator of a good income producing property that in 74 years there had only been 2 owners. The properties that have new owners every other year, probably are not keepers, or the successive owners would have kept them.

    I like longer term tenants, who mow lawns, shovel snow and bring all their own heavy appliances which they then repair and replace. I like properties in good school districts, low crime areas with majority owner occupied properties.

    Buying real estate always has problems, issues and bumps in the road, but for the most part, I’ve had good tenants. At one place I saw the tenant the day they rented the place and never saw then again for the next 17 years. They probably called me 6 times in 17 years, and the only reason they left is I sold the property and the new owner wanted it for themselves.

  5. Andrew Syrios

    The biggest advantage with SFR is probably the ability to acquire them for under market value because there are more REO’s, fixers, distressed sellers and the like. The Great Recession was a bit of an aberration in that department. Of course, the ability to “value add” to apartments and increase it’s price based on an increased cap rate is a huge advantage for apartments as well as them being in one central location, or course.

    • Paul Moore

      Andrew,

      Great point on getting SFRs for below market value during downturns. That is something that is hard to do with multifamily. But I recently reviewed a 190 or so unit apartment that had been purchased from a bank for about $3.5M in the recession (2010 specifically). It was being sold for about $12 million, and still had a lot of value-add meat on the bones. I’d love to be in that owner’s shoes.

  6. Michael Woodward

    Thanks for the article Paul! I’ve been on the fence with rental properties (of any kind) for a long time because of a lot of the issues and points you raised here….. but I need more information.

    Will you consider doing a more in-depth study (and article) on what happened to SFR rental portfolios during the recession? Using examples from the FL market is too narrow because what happened there was MUCH different that what happened in most of the rest of the country (… I was there so I saw it unfold first-hand….). It would be enormously useful to have a broad analysis of this so we can all learn how to avoid the dangers in the future.

    One other clarification I would suggest is, instead of the graph you provided that compares multi-family delinquencies to “everything else” (single family owner-occupied plus rental), provide a graph of SFR rental-only delinquencies vs multi-family so we can see an apples-to-apples comparison (if that data exists). If the graph includes owner-occupied delinquencies, the data gets too clouded and makes it impossible to see the real trend.

    • Paul Moore

      Michael,

      Thanks for your thoughtful comments. I would love to do an article like that. Feel free to message me with any data you find that would help me put it together. I agree that FL is not indicative of the US. I was relating a point about my earlier Rod Khleif story.

      As far as the graph, that was very insightful for you to point out that distinction. I don’t know that the data for this graph exists, but let me know if you come across any.

  7. Dawn Anastasi

    This is one thing about what’s so great about real estate — different strokes for different folks. Personally, with 16 properties, I don’t have any real “hassles”. I maintain a friendly distance from my tenants. I fix things that need to be fixed, and periodically put in upgrades to maintain the properties and make sure my tenants see that they are getting value for their money.

    • Paul Moore

      That’s wonderful, Dawn! I know it can be done, and is being done. But I just met a guy in my neighborhood yesterday morning (Larry) who invited me into his home. It turns out that he has about the same number of rental units as you do. He said he is selling them all off as soon as he can practically do so. He self-manages and said he is on the phone almost all day.

      So my hat’s off to you!

  8. Gene Kamarasy

    Thanks for the article Paul.
    Apartments are truly ‘commercial property’ bought and sold by professionals with good calculators.

    If we accept the fact that interest rates are rising off of 30 year lows, wouldn’t purchasing apt. complexes right now on the assumption that interest rates will remain constant be a losing proposition?
    I realize that in times of inflation rents as well will go up, but the cap rate will be a drag on any wealth appreciation since you will be fighting interest rates. (Not your which you lock in, but the rate which the buyer will be getting when he purchases in 10 years.

    Cheers.

    • Paul Moore

      Gene,

      That is a great point, and one that I emphasize in my book as well. It is the very reason that I am looking to acquire value-add and management play assets. Because by “forcing” appreciation through value-add, one can (hopefully) beat the lost value caused by cap rate expansion.

      For example, say I buy at a 6% cap rate. And in the next 5 years, the cap rate expands to 6.6% (which I see as very likely). This means that the asset effectively goes down in value by 10%. All things being equal.

      That’s why we can’t allow them to remain equal. By doing upgrades in units, improving management and marketing, occupancy, etc, we can hope to increase rents by (say) 20% over those 5 years. While hoping to hold costs close to constant.

      The net result is that the increased value of roughly 20% based on increased net income effectively doubly offsets the loss from the cap rate expansion.

      This is why I don’t buy assets that have no opportunities to make improvements. At least not in this high-flying market.

      Thanks again, Gene.

  9. Nathan G.

    I think there’s room for a healthy does of single-family, small multi-family (2-4 units) and commercial multi-family of whatever size you can handle. Certain properties are easier to buy below market. Some appreciate faster. Others require less supervision but have greater CAPEX.

    To say that single-family is a house of cards is a gross exaggeration. I’m jumping into larger multi-family properties but I’m still keeping my eye our for single-family opportunities.

    • Paul Moore

      Hey Nathan.

      Thanks for the comments. You’re probably right… that is a pretty broad statement if taken at face value. That’s why we said it “might just be” to be sure we didn’t offend everyone on here! 🙂

  10. John Murray

    Crunching numbers and making them work for the investor is the key to success. In August 2006 during the peak of the the subprime era in Portland Oregon the median price of SFH was $260K. Now in June 2017 the median price is about $420K. During the next years following the crash the REOs, shorts were plentiful, now with new residents arriving at 120 per day most of the REOs and shorts are gone. Portland is in a housing crises with 2/3 of residents renting. My 8 SFH house of cards is doing well making me about $250K per year in rent profits and refinance and my gross income was $40K and my taxable income was $16K. My Federal tax liability was south of $2k and state liability was almost nothing. In cities with antiquated infrastructures and declining population those SFH portfolios will decline in the next recession, some are ready to start soon in the Northeast. New Jersey is the first and the rest will follow in turn.

  11. Great discussion on SFH Vs Multi. I have 41 SFH and 17 multi s (7 duplexes & a triplex). I do not experience the problems conveyed in this article. Actually I prefer SFH for the following reasons: much lower turnover rate, (for the last 5 years I have average 5 SFH turnovers a year) (8 year average per tenant,) no common area maintenance with SFH, no interpersonal conflicts with the other tenants to deal with, the multi families have a much higher turnover rate, more day to day attention. I manage all of the properties myself with a maintenance crew. Most service calls are by text or e-mail and I quickly dispatch the appropriate person. I often have mulit-month periods when nobody moves, which allows me to vacation 2 months a year and work a very flexible schedule. As for the purchase opportunities I agree that the SFH market has more opportunies for a below market deal.

  12. Edward Synicky

    There are many ways to make money in real estate, no right or wrong way, just different. I have been investing in SFR for 40 years, had a motel once in Tempe and some multi family in LA and OC CA. in the past. I decided to concentrate on SFR for the long term for the following reasons.
    1.Better financing with lower rates and fixed for 30 years. That is a big one for me as I am a buy and hold investor.
    2. Stable families are looking for a home with a good school district in a low crime area, a 3bd 2 bath 2 car garage fits their needs.
    3. They stay longer, apartment renters move often in general. As an investor you will find that one of your largest expenses is making a unit rent ready. Low turnover lower costs.
    4. Yes they cost more but they appreciate at a higher scale and the rents are higher.
    5. If I want to refinance and buy more I do not need to refinance a 20 until apartment building, I can pick one or two homes to match the amount of money I am looking for.
    6. If I want to do a 1031 it is a much easier proposition to find a buyer for a sfr than a multi family.
    7. In Phoenix during the great recession my rents dropped 10-15%, never had a problem finding a renter as people lost their homes they wanted to make the family feel stable, apt living in most cases did not accomplish that goal.
    8. During the recession I managed to pick up a dozen or so homes in the Phoenix area at half price.
    9. Blackstone is on to something, google the amount of single family homes this trillion dollar company owns.
    10. Yes property management is key, I am a terrible property manager and still do manage our california real estate. But we have good property managers in all of the states we own in, we group our homes for ease of management. Fire the wrong PM and keep the ones that work. My job as a real estate investor is not to manage our properties but to manager our property managers. A much less time consuming job.

    So no right or wrong choice, just mine and it has worked out for well for my family.

  13. I agree with Edward. We have 11 sfhs. A number of the tenants moved from multi family units. We owned 2 4plex units for 5 years. Constant turnover. Sometimes by eviction.

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