Single Family Rentals: Are they a good investment?

Question

Remember when you first thought about investing in real estate? What kind of properties were you searching for? For most investors, the answer to this is probably Single Family Residences (SFR). Does is make sense to stick with SFR in the long run, or should one be looking for bigger opportunities?

I love SFR, they have been a great way to gain experience in the industry, learn about real estate transactions, and have opened my eyes to the true costs of investing. I would recommend that anyone looking to begin investing in real estate should start with SFR, because the learning curve that comes with it is extraordinary. In my opinion, SFR are good investments simply for the experience, but are not a means to an end when it comes to passive income.

There is a huge time investment with these properties, and only makes sense if an investor can scale out their portfolio, and have a company manage it. Time is invested heavily in overseeing the repair, finding labor, managing the property, finding tenants, etc. These properties are time intensive, and from networking with SFR investors they all seem to have one commonality: too many properties all across the city, and they seem to be stretched thin with time. This seems to be the issue with single family rentals, and an investor will have trouble scaling because they are time intensive.

This makes me come to the conclusion, that going into bigger multi-family complexes makes more sense because its scaled out and concentrated in one area. In complexes, 50-80 units there is enough cash flow to pay a property manager a livable salary, and have extra to later invest into other properties. By listening to others experience's, it seems that smaller apartment complexes have the issue that the 10% paid to a management company, is not enough for them to truly care about the property.

Yes, the requirements and barriers to entry are much larger and harder to deal with on 50-80 unit apartment complexes, but it is certainly not impossible. All types properties have their common problems, but as an investor, one has to pick what problems we are willing to deal with. I had a fellow investor tell me "If you keep investing in SFR, then you will continue to have SFR problems. Think bigger and deal with problems that are worth your time."

I would love to hear your thoughts on this and how you view SFR vs Multi-family!

John Teachout · Answer

We only have SFR and have no interest at all in acquiring an apartment complex. I think that sometimes people start with SFR and then "graduate" to multi-family but a multi-family property is really a whole different thing than SFR. Some people have only ever invested in multi-family. I expect that we'll just stick with SFR and maybe would consider a duplex if we found a decent deal but we just aren't inclined to delve into the multi-family. We spend a lot of time renovating properties but as far as managing ones that have been stabilized, we haven't found that to take that much time.

Sylvia B. · Answer

Like @John Teachout, we only invest in SFRs and have no plans to change. There are several reasons for that.

First, we invest in our small (<2500 pop) rural town, which would not support large MF complexes.

Second, because the only apartments available here are low income or senior housing, there is a stigma that would be difficult to overcome.

Third, as John mentioned, apartment buildings are not just bigger SFRs, they are a whole different animal. Procedures and expectations are entirely different. "Common areas," utilities, lawn care/snow removal, and tenant relationships are among the things treated differently. MF owners might say that it's not a big deal, but it requires a change to established procedures. (And I like my procedures!)

Finally, a great deal depends on one's goals. It is true that it is harder to "scale" with SFRs, but we are not trying to grow as big as we can, as fast as we can. Not everyone wants to be a real estate mogul! We currently own outright 13 rental homes, and we are not looking to add more anytime soon.

So, you see, for some of us, thinking bigger is not a problem that is worth our time.

Account Closed · Answer

Yes!!!!

If single family residents is the only place you can start then SFR is better than sitting on the sidelines dreaming big.:)

Dean H. · Answer

@Ivan Guillen

We kind of play like @John Teachout above. We have most of our residential rentals in the Memphis, Tn area. Duplexes and above in Memphis are taxed as commercial so that hit is nearly double. We have also found, at least in Memphis, that there are so many single family rentals available to tenants that most qualified, responsible ones just want single family. Over the years we have migrated to smaller 2 and 3 bedroom homes to keep the folks from dragging to many family members in. Give me the opportunity to by a little " Granny " cottage and i'm all in. Another factor is flexibility, I like the idea of being able to buy or sell what I want, when I want, for what ever reason I want. If I had a large complex that would prove difficult.

Bob Prisco · Answer

@Ivan Guillen not sure how else to answer except with OF COURSE sf are a good idea. Buy as many as you can and of course always look for bigger opps. But hey nothing wrong with having 30 SF. Better then working for a living, at a dead end job that you hate .

Good Luck

Joe Splitrock · Answer

@Ivan Guillen you can have scale with single family homes too. There are people who own hundreds or even thousands of houses in a given market. There are pros and cons. SFH give you higher rents per unit and you avoid inter-tenant issues. There is no common areas with SFH, no yard, no snow and no utilities to deal with.

I do agree larger MFH is the way to go to scale faster, but it doesn't remove problems, it just changes the problems.

Paul Choi · Answer

I skipped SFH and went straight into MF,16 units for my first deal almost 2 years ago.  You have property managers contractors, etc giving you better prices if you have 100 units to work on.  And pricing gets better as you grow your unit count.  For example, you have all 100 unit in 1 city but in 4 different properties, and is still easier to manage than 100 SFH in 4 different cities, etc.

Scale is one thing but also risk mitigation is a benefit with larger deals.  you banks are your friends and they fact check your underwriting to make sure the deal makes sense.  If they see problems with the numbers, the inspection, appraisal, etc, they will tell you flat out or "hint" you with bad terms on the debt.

Take this how you will, but Blackstone recently has cleared their position of their SFH rentals that they have been accumulating over the past years.  I interpret this as cashing in and seeing how the SFH market will do in the next 12-24 months.https://therealdeal.com/2019/11/21/moving-out-blackstone-sells-remaining-stake-in-invitation-homes/

Will Barnard · Answer

As others stated, many start off buying SFR’s and then, if their goal is cash flow, graduate into multi family as the cash flow is often better due to economies of scale. In larger multis, you also have forced appreciation possibilities which offers other income and net worth building opportunities.

Only each individual investor can answer the question of are sfr’s or multis better investments - to each his own.

I started out buying single family for my first investments and I learned a lot while making lots of mistakes but that made me a better wiser investor as I advanced. It was like the first step of the ladder for me. If I could go back and do it again, I would have done larger multi family deals from the start but then again, without the background knowledge and experience, I could have ended up making mistakes that are on a much larger scale, so the question really is, which asset class do you have the most education and experience in to make YOU feel comfortable forking over your hard earned investment capital?

Brent Paul · Answer

You can definitely increase your cash flow going into bigger properties.  But with bigger properties comes larger purchase prices and down payments.  However you could always do a 1031 exchange into a bigger property.

Matt M. · Answer

@Ivan Guillen

I prefer single family. I worry about the what-ifs and find selling a single family has an easier out. Clean it up and throw it on the market. Plus I’ve found some really good houses that cash flow and tons of equity when I’m done rehabbing.

Single Family Rentals: Are they a good investment?

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