Am I overlooking single family properties?

Question

I am a new investor and have been solely looking for duplex properties. I see a lot of nice single family homes for sale and often see investors talking about their portfolios of single family homes. When I run the numbers, I often see little or negative returns on these SF properties. Am I looking at them the wrong way? I'm evaluating against the 1% rule and with utilities and taxes, most of them are negative. Am I missing something? What factors or metrics should I be looking at?

Single or Duplex Requirements I'm using:

150k or less

Turnkey

C Neighborhood or better

Single or Duplex Requirements I'm using:

150k or less

Turnkey

C Neighborhood or better

Nathan Gesner · Answer

It's important to read a little or listen to the podcasts. Sales prices have basically doubled in the last few years and mortgage rates have done the same. This changes the formula.

For example, I was just looking at a property in Cape Coral, Florida. It sold for $250,000 in 2019. It's now listed for $550,000. That's more than double the price in four years, mortgage rates have doubled, but rents are have not doubled. If I put 20% down in 2019 and financed it for 3.5%, the mortgage payment would be $900 and the house would rent for $1,500 a month. With today's market, the mortgage would be $3,000 a month (tripled in four years!) and the rent is around $2,500.

You can't use the formulas from 2019 and make them work in 2023. Prices and mortgage rates have doubled. Until those prices come down or the rent rates increase dramatically, it will be hard to find properties that cash flow like they did in 2012, 2017, or even 2020.

1. Start with BiggerPockets Ultimate Beginners Guide (free). It will familiarize you with the basic terminology and benefits. Then you can read a more in-depth book like The Book On Rental Property Investing by Brandon Turner or The Unofficial Guide to Real Estate Investing by Spencer Strauss.

2. Get your finances in order. Get rid of debt, build a budget, and save. The idea that you can build wealth without putting any money into it is a recipe for disaster and the sales pitch of gurus trying to steal your money. A wise investor will not try to get rich quick with shortcuts. If you can't keep control of your personal finances, you are highly unlikely to succeed in real estate investing. Check out my personal favorite, Set For Life by Scott Trench , or The Total Money Makeover by Dave Ramsey.

3. As you read these books, watch the BiggerPockets podcasts. This will clarify and reinforce what you are reading. You can hear real-world examples of how others have built their investment portfolio and (hopefully) learn to avoid their mistakes.4. NETWORK!!! Get out of your comfort zone. Stop hanging out with your deadbeat buddies that spend all day drinking, talking sports, and otherwise wasting away. Go to BUILD YOUR TEAM at the top of the screen and look for local investors or meetups in your area. You can also find real estate investing groups through meetup.com, facebook, or a Google search. Birds of a feather flock together!

5. Now you need to figure out how to find deals and pay for them. Again, the BiggerPockets store has some books for this or you can learn by watching podcasts, reading blogs, and interacting on the forum. There is a handy search bar in the upper right that makes it easy to find previous discussions, blogs, podcasts, and other resources. BiggerPockets also has a calculator you can use to analyze deals and I highly recommend you start this as soon as possible, even if you are not ready to buy. If you consistently analyze properties, it will be much easier to recognize a good deal when it shows up. Find Brandon's videos on YouTube for the "four square" method of analyzing homes and practice. It doesn't take long to learn how to spot a good deal.6. Study the market. You can learn to do this on your own or get a rockstar REALTOR to lead the way. I highly recommend a well-qualified REALTOR that works with investors and knows how to best help you.

7. Jump in! Far too many get stuck in the "paralysis by analysis" stage, thinking they just don't know enough to get started. The truth is, you could read 100 books and still not know enough because certain things need to be learned through trial-and-error. You don't need to know everything to get started; you just need a foundation to build on and the rest will come through experience and then refining your education.

You can build a basic understanding of investing in 3-6 months. How long it takes to be financially ready is different for everyone. Once you're ready, create a goal (e.g. "I will buy at least one single-family home, duplex, triplex, or fourplex before the end of 2019") and then do it. Real estate investing is a pretty forgiving world and the average person can still make money even with some pretty big mistakes.

Leo R. · Answer

@Sam Munroe as a general rule of thumb, small multi fams will often have better cashflow, and single fam properties will often have better appreciation.

cashflow vs. appreciation is a perennially discussed topic on BP and around other real estate media spaces, and it's well worth educating yourself on the topic.

As is often mentioned, cashflow is similar to defense in the sense that it's relatively unlikely for a good cashflowing property to go into default....but, it's difficult to get truly wealthy from cashflow alone. Appreciation is often compared to offense, in the sense that people who get truly wealthy often get there via good appreciation.

Here's an example; let's say you have 10 properties that are each cashflowing at $1k per month, so $120k total cashflow per year...not bad, right?

Now, let's say you own 10 properties that are each cashflow neutral--the incoming rent is exactly the same as the outgoing costs of operation--you don't make or lose a penny on them each month in terms of cashflow.  However, each of those 10 properties is worth $500k, so the whole portfolio is worth $5 million. If the market appreciates just 3% in a year, that $5 million portfolio gains $150k in equity...if the market appreciates 5% in a year, that's $250k of gained equity.... In a crazy year like some markets had in 2021, 15% appreciation would equal $750k in gained equity on this portfolio in 12 months....  so, you can see how in a year with decent appreciation, the appreciation can very quickly eclipse the cashflow...

Because cashflow is similar to "defense" and appreciation is similar to "offense", different investors will prioritize them differently depending on their position....for example, for a beginner with a relatively low net worth, an unexpected capex of $25k could be devastating if they don't have sufficient cashflow--so for them, a property that cashflows $100/mo vs. $900/mo could be the difference between survival and bankruptcy (they need the cashflow to cover that capex NOW; they can't wait several years for the property to appreciate, so adequate cashflow is critical) ...but a more experienced investor with a net worth of $10 mil can easily survive that unexpected capex of $25k, and to them, whether the property cashflows $100 or $900/mo might be trivial if the property is appreciating well..

Of course, appreciation isn't guaranteed, and real estate can (and does) depreciate in some markets... also, in today's market, it would be very difficult to get a typical single family (or even some small multifams) to cashflow at $1k/mo as an LTR....and then there's the important matter of taxation...all of these are additional factors you'll want to educate yourself on...

There are a LOT of moving pieces to consider in REI.

Good luck out there!

Bob Stevens · Answer

Your in Toledo, you can get 2% or better rule properties. I do all my biz in the Cleveland markets and get 20% net caps, based on cash purchases all the time. Toledo has even higher caps, though little to no appreciation, but great for cash flow. SF, Duplex, MF who cares, buy them all as long as the return is what you want

BTW, duplex does not necessarily NET much more than a SF as you pay water/ sewer and all yard maintenance and snow, Its ALL about NET not gross income

Good luck

James Wise · Answer

In Toledo you don't need to spend $150k on a single family house. You can buy 3 Toledo houses for that price. Slap some Section 8 tenants in those bad boys and roll with the punches as they come and you should do well.

David Bonitati · Answer

Hey Sam,

If you're seeing little to negative return than make sure you're in an area that has property values appreciating.  The sweet spot for me, is 1% with a little appreciation.  I have (2) SFM and (2) Duplex in West Toledo.  I bought them after the last crash and rather than fix and flip, I fixed and held them.  They've provided great cash flow and increased value.  The secret to success in my opinion is taking care of your properties and taking the time to screen tenants so you don't have problems.  My tenants know I take care of the home I provide them and it's their job to respect my properties.  I have a handyman that takes all the calls and does the tenant interactions.  I manage the leases and setup online rent payments so the tenant has no excuse for missing a rent payment.  I spend about 1+ hours a month on my rentals, I have a total of 9 doors.  Maybe if I had more rentals I'd be forced to use a property management company but I like knowing what's happening with my properties so I can quickly address any issue.  Most of my tenants have been with me over 4-years, even with rent increases.

I like that property values are up, as it keeps slumlords out who have destroyed neighborhoods in Toledo, just drive through North Toledo (I grew up there). Just My Opinion.

If I sold today, it would still offer an investor 1% -- Monthly Rent to Purchase Price.  The duplexes even more.

Good Luck!

Anthony L Amos Jr · Answer

Would love to see a sample analysis!

You can still meet and exceed 1% in Toledo, you just have to keep looking. You may have to analyze 100, but if you get a home run it was well worth it.

Scott Johnson · Answer

Throw an address at us that you've analyzed and provide the numbers. Are you using the BP calculator?

Michael Smythe · Answer

You're probably using MLS sales prices for your calculations?

Suggest you turn your method 180 degrees.

Figure out what sales price generates your target return and an write offer at that amount.

Sam McCormack · Answer

Hi Sam, you may just be looking in the wrong area if you are seeing the same thing over and over again. I know in some areas of Cincinnati you will see SFH do a lot better than others, which I would rate C+ areas. Let me know and we can talk some more about it, I have a couple properties in mind that are about 1% right now

Am I overlooking single family properties?

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