Single family residential (SFR) real estate is a huge market in the United States, but traditionally has not been a target of investors. When you think of real estate investing, you may imagine multi-family homes or even small apartment buildings, with tenants paying rent to the owner each month.
When the market crashed, and many mortgages were foreclosed on, many more single-family homes hit the market. This got investors thinking and they started exploring the opportunity. So, the real question, is SFR real estate good for investors?
The goal of any type of investing, including real estate investing is to make money. You want to put your money to work for you and make as large a profit as you can. Your investing shouldn’t be limited to what you think investors do. Be creative and think outside the box. The most common ways that investors are currently using single-family homes are:
- Buying, renovating and flipping
- Buy and hold for long-term tenants
- Buy and hold for vacation rental or Airbnb rental
Each of these types of investing have their own benefits and drawbacks. Ultimately the option you choose is about what fits best with your investing budget and your lifestyle.
To get started in house flipping, you’ll need enough money to buy a home, typically in cash. You’ll be competing with lots of other investors and paying with cash will give you a slight advantage. This is the one drawback for new investors for this type of transaction. Even if you have the motivation to do the work on nights and weekends, without the upfront funds, flipping is difficult.
The other challenge with flipping is that it requires you to have additional money available (or large credit lines), to pay for the renovations, new appliances, contractors, etc. Even if you plan for everything you think a home needs, unexpected expenses come up (think termite infestation or flooded basement) and you’ll need an emergency fund.
What To Think About With a Flip
Financially, with the right planning, and the ability to stick to your budget, flipping a single-family home can be profitable. The one area that people had minimal control over, until recently, was the commission paid to real estate agents on both ends of a transaction. When you think about a flip, you are buying and then selling, in a short period of time. This means that you are paying commission at the beginning and again at the end.
Let’s pretend you paid $200,000 for a home. The standard commission paid to your buyer’s agent would be 2.5%, or $5000. One company is changing this for buyers. Clever offers up to 1% commission rebate at closing. You still get all the benefits of working with an agent on the transaction, but in this case, you would get money back at closing, just for buying a house with a Clever agent!
Now let’s look at the other end of the deal. With a traditional agent, assuming a list price of $300,000, the commission you would end up paying is $7,500. If you list with a Clever agent, you would only pay a flat fee of $3,000, saving you $4,500 that you can use on your next flip!
When flipping houses, every dollar counts, and if you can save some money on commissions, why wouldn’t you? It’s always best to work with an experienced real estate agent, which is why buying and selling with Clever gives you the best of both worlds.
Just like multi-family rental properties, it is possible to secure tenants for 12-month leases in a single-family home. Some people don’t like the feel of an apartment or a condo and want to live in an actual home. The benefits of living in a home include outdoor space, off-street parking, and no neighbors on the other side of the wall.
Using a single-family home as this type of rental is relatively low risk. You have locked in tenants and their rent money for a 12-month period. You may have to fix a toilet once in awhile and make sure the snow gets shoveled (if you’re up north), but otherwise single-family rentals are not much of a headache.
If you compare this type of rental to a 3- or 4-unit multi-family property, the cons are much less. When you are dealing with multiple tenants in the same property, the number of problems and fixes are multiplied. However, so is the income.
Some owners of multi-family properties pay a property management company to handle repair calls, collecting rent, and other associated tasks. This can take the burden away from you, the owner, but management companies don’t provide this service for free. Typically, they charge 10% of the monthly rental income of the property.
The Bottom Line
Ultimately you need to decide what your budget requires and what your lifestyle allows. If owning multiple units and dealing with lots of tenants doesn’t stress you out, go for it! If you are just starting out and want to see how it goes with a single-family home, start there. Any investment can be a good one with the right planning.
If you are leaning toward the traditional route of real estate investing, you still need to watch your expenses and ensure that at the end of the day, your investment is profitable. You should take into account not just the day to day operating expenses of the property, but also the upfront purchase costs. Closing costs, including real estate agent commissions, can add up and take a bite out of your profits.
How to Minimize Overhead
There are ways to minimize the amount of money you are paying in commission. The first is to get your real estate license. If you think you will become a full-time real estate investor, this will more than pay off, but it is not without its costs. There is a fee to take the course and the test. There are annual fees and dues as well.
If you aren’t up for taking a class, studying for a test and then paying dues and fees, you may want to consider working with a flat rate or reduced commission company like Clever. Their business model reduces the amount a buyer pays out of pocket for an agent’s service but doesn’t reduce the level of service you actually get. When investing in real estate always explore ways to minimize your costs, which in turn increases your profits.
Buying a single-family home for the purpose of using it as a vacation rental or an Airbnb rental can be a great idea. Millions of people travel each year, and if the home you purchase is in a popular vacation destination, you’re likely to keep it booked almost constantly. Some vacation rentals are on a weekly or monthly basis, others are daily.
Both types of rentals have their benefits and costs. For each, you will have to furnish the home as well as pay and manage the utility bills. You’ll have to upkeep the outside, whether that means mowing the lawn or shoveling the snow. You’ll also have to keep the home clean and ready for guests.
With a short-term vacation rental, imagine a 3-bedroom home near Disney World, you probably have guests checking in or out every one to two weeks. This means that you are cleaning and restocking the home only every 7-14 days. However, with a longer stay between cleanings, it also means you are less able to address stains and damages quickly.
With an even shorter-term rental, think a 1-bedroom city apartment where lots of people travel for business, you will have guests checking in on average every 2-4 days. This results in nearly twice as many cleanings per month. As with long-term rental properties, some owners choose to hire a management company. This is especially important if you live far away from where the investment property is.
Benefits of Airbnb
Although traditional vacation homes rented on a weekly/monthly basis can be lucrative, one of the benefits of an Airbnb rental is that the daily rate is typically higher than a vacation rental, so you can potentially earn more money. However, you the owner don’t control this rate, it is regulated by Airbnb based on supply and demand in your area.
With both types of rentals, you risk the home being vacant, in other words, not earning you money. As long as you can cover your costs, and even make a profit from the days in the month that it is rented, this isn’t the end of the world. However, have too many months like this and your real estate investment stops being profitable.
Who It's For:
A short-term single-family rental property can be a great option for a first-time real estate investor. Just be sure to plan, budget, and prepare for the unexpected. In addition to planning the financial parts of buying and renting a short-term rental property, you’ll also want to consider your long-term plans.
If you think you will hold the property for 20-30 years, it doesn’t make much sense to evaluate the resale market. However, if you plan to hold it for a few years and then sell it to reinvest in something else, you will want to get an idea of the real estate market in that area.
The Right Agent
Just like purchasing a home to flip, working with a Clever agent can help you to save money at closing when buying a short-term vacation rental. All Clever agents are experienced and knowledgeable in their geographic area. They can help you to determine what properties will have the best rentability and long-term resale value.
Additionally, if you plan on selling your investments in the future, then working with a Clever Partner Agent can reduce your expenses significantly. Clever agents are flat-fee agents, meaning you only pay 1% or less on commission for the same great service.
Using a 1031 Exchange to Your Advantage
For serial investors, they have learned ways to minimize their tax burden. In addition to the typical tax deductions they use for property improvements or depreciation, they also use what is known as a 1031 exchange.
The main premise of a 1031 exchange is that you can sell an investment property and use the proceeds of that sale to reinvest in a new property without paying capital gains taxes on the profit. The exchange must be “like for like” meaning that you cannot sell a rental property and buy an antique car, but you can sell a rental condo and purchase a multi-family home.
Cons of 1031 Exchange
As with most things tax-related, there are some pitfalls to be aware of. A 1031 exchange is time limited. The law states that you must identify the new subject property within 45 days of closing on the original property. You can identify up to three different properties, but ultimately must purchase one of them. Also, you must close on the new property within 6 months of the sale of the first.
These rules and timelines sound tricky but are well worth it if you can save $50,000 or more. A good real estate agent is familiar with the 1031 exchange process and will work quickly to help you identify properties and get to the closing table. Seasoned investors regularly use the 1031 exchange to move their assets around.
SFR Real Estate: Great for Investors
By now it should be obvious to you that SFR real estate is good for investors. In fact, it may be great for investors. With the right property and the right plan, single-family residential real estate can be very profitable.
Depending on which avenue you choose, flipping, long-term rental, or short-term rental (vacation or Airbnb), it may be a better option for you than multi-family real estate. All real estate investing comes with challenges, the goal is to manage those challenges and minimize the unexpected.
Do your research, find the right property, and make it make money for you!