One of the best things about investing in real estate is that there are so many property options to choose from, which makes real estate investing a very flexible endeavor. But single-family homes, in particular, offer a number of distinct advantages over other types of properties that warrant serious consideration.
If you’re new to real estate investing or are a veteran who’s looking to expand your portfolio, consider the following reasons why single-family housing might be the ideal type of property to invest in.
1. Value Doesn’t Rely Solely on Rental Income
Single-family properties that are rented out bring in monthly income, but this isn’t the only way that they provide value to the owner. The value of a single-family rental can hold its value in the market regardless of how much rent is being collected.
To illustrate, let’s use a multi-family complex as an example. These types of buildings tend to increase or decrease in value depending on the amount of rent produced. Instead, a single-family home can increase in value – whether rented out or vacant – based on how attractive it is to buyers who are looking in the area. While the income potential of a home is certainly an appealing feature, buyers who are looking to actually move in rather than use it as an investment property will still recognize its value, and pay accordingly.
Houses have a tendency of retaining their value and are pretty stable relative to the market. They’re more likely to appreciate more over the long run than other types of real estate. This could be due to a number of reasons, but it probably pertains more to how lenders value these types of investments. Single-family homes are valued based on supply and demand of owner-occupied buyers, which is not the case for multi-family properties that are valued based on the rents coming in and what the condition of the property is.
If single-family homes are well-maintained and located in a desirable neighborhood, there will always be demand for them. Generally speaking, there are typically more buyers for single-family houses than for other types of real estate.
2. Lower Turnover Rate
Compared to apartments, occupancy rates for single-family rentals tend to last longer. Generally speaking, single-family homes usually have much longer tenancies compared to apartments and condo units, typically turn over every second year. By comparison, tenancies for single-family homes usually last anywhere between three to five years. This can represent significant cost-savings when taking re-renting costs into consideration.
3. Easier To Finance
Mortgage guidelines vary from one lender to the next, but financing single-family homes is usually a lot easier compared to multi-family properties. For starters, single-family homes can often demand lower interest rates and higher loan-to-value (LTV) ratios, making it easier and more affordable to get approval for a home loan.
It should be noted that a mortgage to finance a rental property will be subject to different mortgage rates compared to loans for owner-occupied properties – as much as 0.25% to 0.50% more.
4. Lower Operating Costs
The cost to maintain single-family homes can often be lower compared to condos that are governed by a homeowner’s association (HOA) where a monthly fee needs to be paid to cover the expenses related to the property and community upkeep. There is very little or no common area maintenance expenses compared to condos and apartments. Depending on the complex and the amenities that are offered, these fees can be very expensive and can quickly eat into profits.
Maintaining a single-family rental can cost significantly less than a condo, especially if the owner handles these tasks themselves or the tenants take care of them. Tenants of single-family homes also tend to be responsible for paying their own utilities, which can translate into major savings for the property owner.
5. Depreciation Tax Benefit Trumps Commercial Investments
When comparing single-family homes to commercial properties, there is a much greater benefit from depreciation for the former. While commercial properties are depreciated over 39 years, single-family homes are depreciated over 27.5 years. This shorter depreciation time frame can translate into a bigger cash flow for investors.
The Bottom Line
The exact location of the single-family property and its current market will obviously play a key role in whether it makes the best investment. Having said that, there are still plenty of benefits that come with investing in single-family homes compared to multi-family buildings or commercial properties. They’re particularly attractive for novices who are just starting out in the world of real estate investing and are just beginning to grow their portfolio.