Can a 3/2 SFR Not Be a Good Rental Property?

Question

I feel like I have an image in my head of what a rental is and I feel that is affecting my search for an investment property.

I toured a foreclosed property in my area that is a 3 bed 2 bath, large, open concept house. It's just shy of 1900 sq ft. Has a wood fireplace and a large deck outside. Structurally, the place is solid. The crawlspace is like 3ft with lights and a moisture barrier. The roof is new with proper venting and no signs of water damage. The house was built in 1989. Sits on 0.68 acres so a nice large back yard. There's a 3 car detached garage built pole-barn style. So concrete floor, but at the edges it's not sealed so you can see grass and such. There is what seems to be a 2 car attached garage converted to usable space because there is a huge bonus room. This room is big enough to have like a ping pong table and couches around all the walls and then some. In actuality, I'd really like to live in this house haha. The work to be done is all cosmetic. There's a hole in the ceiling where someone stepped thru. Needs new flooring and paint and trim and the kitchen needs a complete remodel. Overall, the place is great. If I purchased it, I'd move in and do a live in flip.

My focus is the BRRR strategy and this house is listed at 86k and would appraise for 150-170k says my agent, however I think it would appraise for the higher end of that (160s).

To me this property doesn't fit the "stereotypical rental house" I have in my head. Which is like a small house on a small lot with an attached garage and overall is simple. But this house with it's huge space, 3 car detached, and large backyard feels more like a home someone would buy and not rent. Growing up, the only place I knew of people renting were apartments or college kids. In my mind, no one rented a house unless you're in a city (I grew up in rural KY) and in my mind you wouldn't rent s property with this much potential.

Am I wrong? Are people renting houses that don't fit a mold of sorts? Are families wanting to rent properties with all this space? A friend who owns a house just down the road from this one rents a 2 bed with a small bonus room for 950 month and a 3/2 typically goes for around 1100 or so. I feel like a property like this should go for 1500 with all the extras it has. Not sure tho?

Any thoughts would be appreciated!

Patricia Steiner · Answer

My investor clients have purchased larger SFH as rental properties and here are the lessons learned:

1. It's expensive to re-rent; more space to paint, more floor to clean.

2. Lawn service and the like has to be included in the rent.

3. The rent they thought they would get, they did not.

4. The maintenance requests were more frequent than at smaller properties.

5. Overall expense and vacancy higher than others.

My recommendation:

What is the rental demand for that size of property? What is the market rent for it? Make sure the demand is there as well as the rental price before making the leap.

Require a substantial deposit.

A one year lease would be the minimum term.

As a buyer, you won't be paying commissions so why not find a realtor who works with investors to add bench strength on this transaction by doing market research on the potential rental value. If you like the results of the market analysis, asks the realtor if he/she will list on the MLS at no charge if you purchase it.

And, to muddy the waters further: my clients who purchased larger SFHs, sold as soon as they could. It wasn't worth it.

Please keep us in the loop...I'm anxious to hear what you decide!

Nicholas Morgan · Answer

Hello everyone! I really appreciate everyone's input on this. I wanted to provide an update. The property went pending the day after posting this so it's not much of an option at this point. However, I've learned through this and all your advice will help me when looking at properties to rent in the future!

In other news, I've got another property I've got my eye one. I'm currently raising private capital and have a colleague who may be interested up to 50k to invest! The property is 60k list price and needs about 15k of rehab based on my initial assessment. So, it seems to be coming together! I'm excited!!

Sylvia B. · Answer

2 possibilities: It could be that in your area this is "too much house" for a rental, or it could be that it would be in greater demand if there are people looking for nicer, bigger houses to rent, rather than buy.

Extras, Hmmm . . . Most have larger yards, up to 3/4 acre, brick or stone siding, deck or patio. A couple have full basements and fireplaces. All are in "nicer" areas of town. The key is, we bought them right. Most we picked up at auction, one was an off-market deal, all considerably under market value.

Patricia Steiner · Answer

Nicholas, to respond to your question that you posed to me on lawn service, we found that tenants were at first agreeable to assuming responsibility for lawn service but that quickly became an issue. Re=sodding/landscaping is too expensive and we found that the only way to protect that investment was to ensure its care. Unfortunately this was proven time and time again...

As your own home, go for it. Enjoy it. And, when the time comes that you would like to move on, renting isn't the only option. If you buy it right and don't over-improve, possibly the appreciation will make it a great sell - and the funding for a property that you deem more in keeping with your ideal rental property. You have options so you don't have to make a definitive exit strategy based on just one option. That alone is a win...

Natalie Schanne · Answer

@Nicholas Morgan - If you want to live-in flip this house and you think it’s a great price relative to the amount of work it needs and what it’ll be worth later, why don’t you? If you are willing to share your space because the house is too big and nice, you can pick up a roommate or two for $500/mo each or whatever like I did. Then you can write off 1/3 or whatever proportional % of your utilities, repairs, taxes, etc. against that rental income. And still sell with no capital gains after 2 years (up to 250/500). When you’re thinking about buying your next home, contact several local real estate agents and ask what it’ll sell for and what it’ll rent for. Then maybe list it for rent and sale both simultaneously. You’ll probably find it’s better to sell it after you calc the numbers (ROI/cash flow) and free capital gains $$.

Nicholas Morgan · Answer

@Sylvia B.

For me, I think it's the larger house plus the 3 car detached garage plus the large covered deck + the large yard that makes it feel more like a home someone would purchase.

I appreciate your insight into the maintenance side of things. Do your larger properties have a lot of "extras" or are they just large houses? I think it's all the extras that make me feel likes it's not a rental.

Sylvia B. · Answer

Perhaps that is area specific. I have different experience in my area.

• Yes, the larger the house, the more costly it is to turn. That's only reasonable.
• Our tenants are responsible for lawn care and snow removal.
• If proper research is done, the landlord has a good idea of the market rent.
• I get more, and more expensive maintenance requests from my smaller houses.
• Overall expenses [as a percentage of rent] and vacancy are lower than smaller houses.

My houses range in size from 600 to 3000 sq ft.

Nicholas Morgan · Answer

@Robert LaPrelle

It's interesting you mentioned "too nice" because that's what I said when discussing with my wife.

Also, with the large room it has a portion jutting off of it the size of a bedroom. I feel like if I left it as is people would want to have a wall put up to turn it into either an office, or bedroom, or storage room, etc. If I lived there, I would probably do that.

If that space was still a 2 car attached garage and there was no 3 car detached I think this would be a perfect rental because then it would fit better with my idea of an ideal rental.

I know it's a great deal, but not convinced it aligns with my current goals.

Nicholas Morgan · Answer

@Patricia Steiner

Oh that's a good point about re-renting. I didn't think about that.

Out of curiosity, why would lawn service have to be included? My assumption is the tenant will mow their own lawn.

A part of me thinks it could work well for a fix and flip because it *feels* more like a house someone would want to purchase and not a rental. .....buuuuuut, I'm trying to focus on my goal of a BRRR property for passive income.

Like I said, I'd like to live there but I wouldn't purchase it if I didn't have a plan to rent in the future. My current home is 15 miles from this property and is a 2/1 and will rent for 1000 or perhaps even 1100 and to me is a stereotypical rental. 750 sqft, nice large yard, carport, and a shed. Small, cute house with enough "extras" to be desirable, but not enough to make it feel like a non-rental (again, just my perception).

Lynnette E. · Answer

Look at your local market for long term transient workers.

Does the local hospital bring in foreign nurses or doctors? If so they often rent nice houses in the local area. Many stay for 5 years at a time, and they often renew their contracts.

Do you have long term development project going on nearby, dams, solar or wind generation facilities, or many new businesses such as a car factory starting that will bring in management from other locations? How about military bases?

If you have these types of potential renters, you will do fine.

If its an area with the same ol' families of renters for the past 50 years, maybe they are used to the smaller homes, and buy when they can afford a larger one. Then rent to own comes into play.

I am preparing 2 larger than normal for the area rental properties now. They were foreclosures and need major rehab before they are livable. The local police chief already inquired about one of the properties for a new hire police officer and his family. A group of teachers who work on the same street already asked to look at one house, even though it is a ways from being ready. Another house has a neighbor whose son wants to rent it so be by his parents for child care.

So there are possibilities, you just need to look and see what they are in your area. And remember that the executive's wife who was just transferred will be calling for new stuff on the house constantly. The police just out of the academy won't. Choose wisely!

Can a 3/2 SFR Not Be a Good Rental Property?

Can a 3/2 SFR Not Be a Good Rental Property?

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