Are You Missing Out on the 2 Bedroom SFH Rental in Your Market?

If you’re looking to buy single family homes as rentals, almost all the information you find will suggest that a 3 bed 1 or 1.5 bath is the sweet spot. Given today’s low rates, the additional acquisition cost is usually much lower than the additional rent you can demand for the third bedroom. I agree with this sentiment and most of the SFH in my portfolio are 3-beds. However, the 2-bed might be an underutilized opportunity in your market.

First and foremost, this is market specific and you need to understand your area’s rental rates. A simple exercise to get started is to run an analysis of 2-bed and 3-bed rents in your area and compare these data points to the difference in purchase price between a 2-bed and a 3-bed. We’ll also compare these 2-bed SFH rents to condo prices, but more on that in a minute.

Personal example:

I own a 2/1 SFH and a 3/1 SFH three blocks from each other. The 3/1 receives $1,395/m in rent and the 2/1 is now up to $1,225/m. Both were purchased in 2019 and my all-in purchase and rehab cost was 90k for the 3 bed and 65k for the 2 bed.

*I did not include the typical vacancy, maintenance, capex to keep this example simple, but it’s important to note that the turnover rate on a 2-bed will historically be higher as it will be more a transient tenant (hence why everyone preaches the 3-bed). Therefore, it makes sense to adjust your turnover costs accordingly.

This is not a debate of which property is better, but rather an example to show that at a high-level, the 2-bed return can be closely aligned with the 3-bed, as the additional rent for the 3 bed is roughly the same as the additional mortgage, property tax, and insurance payments.

Important notes:

1. The 2-bed return is actually higher as you’re spending less money to get to the end result so you’re cash-on-cash is much better.

1. See the note above regarding turnover, this is specific to your market, but note that you should adjust the turnover/vacancy for the 2-bed. Your first comment will be “well Tom, now the 3 bed has a better return.” I’m not saying that the 2-bed is better or worse than the 3-bed, just that you can potentially find similar returns with a 2-bed in today’s heated market.

1. In your area, that rental gap between the 2-bed and 3-bed might be much larger and the 2-bed might not work. However, in some areas the gap is minimal and there is less competition to obtain the 2-bed rental.
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So why does the 2-bed rental work in certain markets?

With a 2/1 SFH you’re also potentially competing against condos and apartments. If condo and apartment prices have increased year-over-year at a rapid rate, your 2/1 SFH benefits as you have a competing product that includes a yard, personal space and provides a truer sense of ownership to your tenant. If condo/apartment rents have increased at a greater rate than the rents for a 3-bed SFH in your area, the 2/1 SFH becomes a great alternative. This is especially true in today’s environment when more people are looking for space (note you might be up against condo amenities, so factor those into your comparison).

(Above picture of a recent 2/1 rental)

I have also found that the three 2/1s I own in Chicago, have all been much easier to BRRRR. I’ve been pleasantly surprised with my appraised values and I think this is because appraisers utilize data points like price/sq ft which tend to favor smaller properties. More importantly, I’ve been able to buy right as there was less competition for these products.

So if you’re struggling to find the perfect 3/1 due to the high market demand, check out the 2/1s in your area and compare their market rent and acquisition prices to both 3/1s and condo/apartment to see if you have an alternative option to grow your portfolio.