SFH real estate is a popular property type for investments, but it's not the right choice for every investor or investing style and plan.
SFH real estate (or single-family home real estate) accounts for 35 percent of the country’s 44 million rental units and is the fastest-growing sector of the residential rental market.
This makes it sound like a pretty promising investment opportunity, however, when it comes to deciding whether you should invest in SFH real estate or other property types, landlords and investors need to be aware of several key factors. The property type that you choose will depend on your long-term financial goals, location, investment style, and the time you have available to manage them.
In this article, we take a look at various property types, their pros and cons, and our top tips for investing in single-family homes successfully.
There are three main potential property types you can choose from when looking at residential investment properties. These include:
All three of these properties can be rented out and allow you to generate long-term wealth through real estate. But, they each come with their own idiosyncrasies and advantages.
For example, single-family homes tend to achieve greater appreciation and their value is often less susceptible to market corrections. This makes it a good choice if your investment strategy will involve you refinancing, taking advantage of a 1031 exchange, or selling within a shorter period of time.
Condos, on the other hand, are generally cheaper to purchase, but often allow you to charge similar rates as a SFH, and as such often come with a higher cap rate. However, they have additional fees such as HOA costs.
Finally, multi-family units. These cover a broad range of buildings, from duplexes to apartment buildings. Many investors choose to focus on the number of doors as this often correlates with overall cash flow and the quickest way to increase the number of doors in your portfolio is to look at multi-family units.
From a landlord’s perspective, owning multiple smaller units will allow you to increase your portfolio faster and maximize income. From a renter’s perspective, you get the most value and are more likely to stay in a property for longer if you get better value and more space with a larger SFH property.
Usually provide better capital appreciation, more expansion potential, more tenant type flexibility, and potentially less tenant turnover.
More hands-on maintenance, and a lower rental income yield.
For those who would like to live in the home, make improvements, and then rent out the home, a SFH is the best investment property.
Cheaper to acquire and may provide a higher rental income yield.
HOA fees and HOA regulations may restrict rental freedom and reduce rental profits.
You’re the king of your condo, but not the king of the common domain. Those who cannot afford a single-family home, or who like spending less time on maintenance should consider a condo.
Provide maximum rental yield income and a high amount of tenant type flexibility.
Potentially higher turnover rates and more active management by the landlord.
For those who have more energy and more time and want to scale their portfolios fast, multi-unit properties are the way to go.
Related: What You Need To Know About Investing In Commercial Real Estate
You want to maintain a professional relationship with your tenants throughout the tenancy. This means being friendly but not becoming friends. For example, have set methods of communication and always use a professional tone respond promptly to their inquiries and when necessary or relevant, offer what assistance you can. Having a clearly defined and professional relationship with your tenant will make it easier to deal with scenarios such as late rent, rent increases, complaints etc.
In order to avoid bad tenant scenarios, you need to be thorough when selecting and screening tenant applicants. Don’t simply choose the first tenant that applies. Develop a systematic tenant screening process and follow the same process for every single applicant. You should have minimum criteria that every tenant must meet and if it doesn’t deny them on those grounds and those grounds only this is important for both legal and practical reasons.
As a general guideline, landlords generally look for tenants to have an income equal to 3 times the rent, a good credit score of 600 or more, and no prior evictions.
As a final word on this note, you should also make sure you are familiar with the fair housing act and any additional state-level laws and guidelines.
You can collect applications, prescreen tenants, and run comprehensive screening reports with Landlord Studio. Find out more…
Throughout the tenancy, you’re going to need to communicate and deal with your tenants. These communications could be for a variety of reasons, for example, maintenance requests or complaints about neighbors.
As the landlord, you should respond to each of these inquiries quickly and help them when you can. Being attentive to your tenant’s needs will encourage them to rent for longer and reduce the need for you to eventually have to replace them. This will help you avoid costly vacancy periods and marketing costs.
Renting to friends and family can quickly muddy the water. At best it will complicate the relationship, at worst they will expect preferential treatment and leniency. Should they fall on hard times and be late with the rent they will likely expect you to make an exception. However, you are running a business and that business has numerous overheads and costs, a breakdown in cash flow could quickly see your rental business losing money.
Markets can fluctuate dramatically from month to month and year to year. as such landlord investors should keep a weather eye on the market and comparable properties in the region. This is essential if you are to charge a competitive rent rate. Charge too much and your tenants will likely leave and it may be hard to find replacements, charge too little and you’re leaving money on the table.
Ultimately, the property you choose needs to suit your investment strategy and long-term financial goals. Additionally, it should suit the time you have available and are willing to put into managing your rentals.
Whichever property type you choose in the end it is essential that you have the right tools and software available to operate a professional and scalable rental business. For example, Landlord Studio allows you to streamline your tenant applications and tenant screening processes, helping you find and identify the very best tenants as fast as possible.
Additionally, you can use our online rent collection to enable your tenants to automate their rent payments so that you never have to deal with late rent, and you can use the software to easily track income expenses, saving you time and money when tax season rolls around again.
Find out more about how Landlord Studio can help you better manage your rentals.