Whether you’re brand new to investing or a long-time pro, you may have found yourself wondering precisely why single-family homes are the best investment.The answer? Not only are they tangible assets that can appreciate in value over time, but utilizing them in a rental portfolio can bring in steady cash flow for many years to come. Of course, the right path for you depends on your individual investment goals. For example, if you’re looking for a high rate of passive income that is more consistent, have the time to dedicate to more property, and don’t mind the high price point, then a multifamily property might be a better fit for your portfolio.In general, though, single family homes tend to prove the best investment overall, and in this article, we’ll show you why.
Lower Purchase Prices
One of the reasons why single-family homes are the best investment is the approachable price point.The thing about multifamily properties is that more property equals a higher price tag. If you’re looking at an apartment complex, for example, then that price tag could be in the millions. However, there are many different single-family homes in a wide range of markets that are well below that price and more realistic for investors looking to get their foot in the door.While the national average for single-family in 2022 was over $400k, there are some areas where these homes are very affordable - we’re talking within the $100-$200k range. Additionally, if you go for a class C or D property, that price point becomes even more reasonable. It is worth mentioning that these properties may come with higher maintenance costs, but that’s not always the case.
When You Can Buy a Single-Family Home for Below Market Value
There may be special occasions where you can buy a single-family property well below the market value. For example, if the owners need to sell ASAP, they may be desperate to get the property off their hands and lower the price in order to sell faster. Purchasing a home for below market value means you start the process with equity. You’ll have to act quickly, but if you’re able to do so, you can get pretty great cash-on-cash return in the end.
Simpler Maintenance
When you’re a landlord, no matter what type of property you own, the most time- (and money-) consuming part is maintenance. Repairs, tenant management, rent collection, and so on are continuous parts of rental ownership that requires 24/7 dedication. This is why many rental property owners hire a property manager to handle that full-time job for them. With a multifamily property, you have multiple units, multiple tenants, and way more property to manage. This is both expensive and time-consuming. For single-families, this expense is significantly less. The home is only one unit, meaning there’s one lease to handle, one tenant to coordinate with, and way less property to maintain. Less property also means less appliances, flooring, and plumbing to repair when the time comes.
More Financing Options
Qualifying for mortgages tends to be easier with single-family homes than with alternative investment property options. Since you have several different options for financing a single-family home, you can more than likely qualify for a conventional loan, especially as a first-time investor.Some options include:
- Mortgage loans
- Conventional loans
- FHA loans
- Home equity loans (a second mortgage if you already own a home)
- Seller financing
- Private lenders
What makes it an even better situation for investors is that you can compare them and find one that fits your financial situation with so many loan products available. Several lower payment options may be available to those who seek loans through credit unions, banks, or other traditional lenders.
Wider Pool of Tenant Applicants
For investors looking to rent out their property, it’s definitely worth noting that single-family properties draw in a wider pool of potential residents. There are several reasons for this. The first is that single-family homes tend to be the preferred living space for most people. No noisy neighbors or shared spaces!The second is that single-families can accommodate more demographics than an apartment or a condo. Large families can inhabit single-family homes, but so can couples as well as individuals. When trying to avoid vacancies, a large pool of applicants can mean placing a reliable tenant much faster. Having an overabundance of choices means you can also be more selective in finding the best tenant possible.
Potential Appreciation
Out of every type of residential real estate investment, single-family homes have shown the fastest appreciation. This is mostly due to high demand. Location, size, and upgrades to the property can all work together to further increase value. For investors who plan to hold a property for longer periods of time or in a fast growing market, natural appreciation alone can add cash to your pocket without extra work on your part, unlike multifamily properties that are typically priced based on their cash flow.
Easier to Buy and Sell
The multifamily market is infamous for its level of brokerage difficulty. Since they’re a large expense with a niche buying market, it can be challenging to get a multifamily off of your hands in a timely manner. Similarly, because these properties aren’t on the market very often, it can be difficult for investors to acquire one at all, let alone one that meets their specific criteria. On the other hand, single family homes are in high demand. They are sought after by both investors and residents alike. A single family can be sold as a rental but does not have to stay a rental. It’s up to the owner, which means its use-case is very versatile. Investors will often find that both the buying and selling processes are much simpler for single-family properties than other types of real estate investments.
Tax Benefits
A notable pro to owning a single family home is the numerous tax benefits that come along with it.Especially for landlords who wish to turn that property into a rental-income generator, there are several write-offs and other benefits that can potentially put money back into your pocket. If you’d like to read more about single family tax benefits, we recommend you check out this article: Taxes for Single-Family Investors: Our 5 Powerful Tips
Mortgage Write Off
One of the most notable tax advantages for a single-family home is the ability to write off mortgage interest payments as a business expense. While the specifics on this one vary and it’s recommended that you talk to a CPA, this tax break can provide great relief for investors.
Business Tax Deductions
As a rental property owner, you’re considered a business, which means you can write off items such as:
- Mileage and travel expenses
- Property Manager
- Property-related services
- Property taxes
- Repair and maintenance costs
- Utility bills
- Insurance premiums
These expenses can be added onto your Schedule E and subtracted from your rental income.
Depreciation
Over time, a rental property depreciates in value due to wear and tear. Additionally over time, a property owner will spend money on repairs to bring the property back up in value. The government understands this, and that’s where depreciation comes in. The assumption is made that a property will depreciate in value over a certain number of years. In the case of single-family rentals, that number is 27.5.The government then assumes that an owner will put a certain amount of money back into the property each year to bring its value back up, therefore those funds can be written off as an expense. This means that each year you can divide the cost of the property by the number of years it will depreciate over and subtract that amount from your rental income.Say you paid $200,000 for the building alone (land cannot be depreciated, so the cost of the land is excluded).For the first year, you could calculate it like this:200,000 / 27.5 = 7,272.73That’s over $7,000 saved in rental income every year!
No FICA Tax
For self employed individuals, a 15.3% tax is added onto all income - and that’s before income tax. If your rental income qualifies as passive income, you can skip out on the FICA tax, which can potentially save you thousands of dollars per year. Again, it’s recommended to talk to a CPA to ensure the exact criteria needed to qualify, but this is a tax break to be on the lookout for.
Diversification
Another reason why single family homes make a great investment is diversification. It can provide this for your portfolio in two main ways.The first is that if you currently hold other types of investments, single-family is a low barrier to entry to add real estate onto the list.The second is that with a single-family, you have a lot of diversity within that type of investment itself. There are hundreds of different markets all over the country to choose from that each have their own unique benefits. With the help of a trusted property manager, you could receive passive rental income from coast to coast. There’s also the difference in home sizes, neighborhoods, property classes, etc. If you’d like to hold a diverse real estate portfolio, then single family is the property type for you.
A Tangible Asset with Higher Liquidity
With single family investments, you get the best of both worlds. While real estate is never itself a liquid asset, single-family homes have higher liquidity than other types of real estate, meaning it’s easier for you to get the most cash out of your investment without losing it to other costs.For example, appraisals tend to cost less for residential properties versus commercial ones. Additionally, down payments tied to financing also tend to be lower in comparison with other types of real estate.
Final Thoughts
While the right decision will ultimately depend on your individual goals, single-family homes can make a fantastic addition to any portfolio. From higher liquidity and lower purchase prices, to easier management and tenant acquisition, there are many pros to these types of properties. These properties can become an even greater asset when you have an experienced team by your side. Whether it’s a broker or a trusted property manager, having access to knowledgeable resources that have your back can save you time, money, and stress.To acquire your first (or next) single family property, talk to our brokerage team today.
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