Rental real estate investors have long touted the low risk and stability of investing in affordable housing. They note: “Everyone needs a place to live.” The COVID-19 pandemic proved to be a real test of this mantra. In March 2020, landlords discovered that even when shelter orders prevented people from working, they were still paying rent. Are single-family rental homes a good investment during COVID-19? Let's dive in!
In this guide:
Surveys Show: Renters Pay Their Rent
Rental property owners across the country braced themselves for what experts predicted would be at least several months of unpaid rent. But it turns out there wasn't much to worry about.
- In May 2020, Multi-Housing News reported that 87.7% of tenants paid all or part of their rent. For comparison, let's note that in the same period last year, 89.8% of tenants paid their rent.
- A survey of the apartment listing site offers even more hope. It found that 79% of tenants are at least somewhat confident they can pay June's rent. Tenants feel they will be able to pay even if the “shelter in place” remains in place.
- The survey data did not reveal differences in rental payment trends for apartments, condos, townhomes, or single-family rentals. But there's reason to believe that single-family homes are more resilient to the economic effects of rising unemployment, such as the one we're seeing with the pandemic.
Investors flock to single family rentals. They see that the companies that own the huge rental apartment groups are weathering the current crisis much better than they feared. Many investors expect single-family homes to be more desirable to live in, but also more expensive to buy.
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What Is a Single-family Home?
A single-family home consists of one unit housing one family. It is located on its own plot of land, connected to any other residential structure. In business, we call them “detached” because they are not connected to another house. They usually sit on a lot that is at least a quarter acre.
This type of rental housing tends to have higher “tenant stickiness”. This means that renters are less willing to move as often. Single family rentals increase tenant loyalty for several reasons.
If you want to buy a single-family home for rent and need extra money to pay for repairs or renovations, check out Monevo, a platform where you can compare loans.
Reasons for Increased “Tenant Stickiness”
- Confidentiality. there are no other tenants above, below or next to you. Tenants, of course, prefer this. There is no sound of other tenants arguing through the thin walls. No kids running around endlessly upstairs. That fishy smell wafting through the building is your own food, not your neighbor's.
- More spacious than a town house, condo and apartment. the tendency to feel claustrophobic in space is reduced. That two-bedroom, two-bathroom apartment sandwiched between the upstairs and downstairs units must have felt cramped during the stay-at-home policy.
- Personal involvement in property maintenance increases emotional connection. living in the same family provides an emotional connection to the property. Tenants can plant any flowers they want, add their own patio furniture, and watch their kids play in the garden. It's your home, not just a rental.
- Free storage is available on site. Americans have a lot. A single-family home provides more storage space than any other type of home: attics, basements, sheds, closets.
- It is more like a house than a rental. there is often a larger indoor area as well as an outdoor area such as a garden or terrace. Renters with pets and small children tend to settle more permanently in a single-family home with a fenced yard where kids and dogs can play and play.
- School sustainability. single-family homes attract families with children enrolled in the schools they want. Changing schools is a major disruption for children and parents and can be avoided if they stay.
- Other conveniences — Single-family homes provide amenities and conveniences not always found in other rental options. These include off-street or even garage parking, a washer and dryer in the unit, and additional living space.
If you want to invest in a rental property but need extra cash for a down payment, you can use a service like Hometap. Hometap invests in the equity in your home, and they make their money when you sell the property or pay off the investment with them before the 10-year term is up. It's just a way to get extra money without taking out a traditional loan and making monthly payments.
Single-family vs. Multi-family Property
Single-family homes are often out of reach for investors looking for cash flow. Multifamily homes offer much higher yields relative to sales price, in part due to limited interest in multifamily properties. The real trick is in the details. A collection of events favors single-family homes over multi-family properties as an asset class.
The advantages of a single-family house can be divided into several main components.
- Appreciation – Single-family homes tend to appreciate more quickly than multi-family properties due to the shifting demand curve. Investors tend to have much greater access to capital on a more reliable basis, while domestic demand ebbs and flows with employment. Investors who use leverage to acquire single-family properties have a significant cash advantage in the face of any increase in rental property values.
- Liquidity – At any given time, many more buyers are interested in single-family living than multi-family properties. For one thing, higher apartment prices shut out much of the market that is interested in owning a home. Second, few people who are interested in a single family are interested in the rental business. even with a discount, few will agree to move into an apartment building. Also, most of the live market is probably already trying to escape the common wall with someone else.
- Future tenants. This is purely anecdotal, but the experience of other landlords suggests that the single family rental pool is better than the duplex or condo rental market. Renters in single-family homes are more likely to be established families; people who are interested in living in the same place for a significant period of time because of proximity due to work, school districts, or neighborhood choices. Low turnover increases rental profits because the home faces fewer vacancies and requires less tenant-to-tenant maintenance, such as painting and landscaping.
Whether you're considering single-family or multi-family real estate, you probably need a good real estate agent to help you find a home. If you're looking to buy a rental property and need help navigating the market, you can use a free service like HomeLight to find a real estate agent in your area to help you find the best deal for you.
Pros & Cons of Single-family Home Rentals Over Condos, Townhomes, and Duplexes
In addition to “tenant stickiness,” there are other advantages to single-family home investing.
- Higher market appreciation potential — In many areas of the country, single-family homes benefit from higher long-term market appreciation than other housing types. Appreciation is one of the biggest benefits of real estate investing and vital to wealth creation from real estate holdings.
- Monthly cost savings — The monthly cost of owning and renting out a single-family home can be less, as there are no monthly condo fees. And HOA fees tend to be less common and lower on single-family homes (although these things vary and depend on local market dynamics, of course).
- Easier to manage — It's much simpler to manage one property housing one family paying $3,000 a month than it is to manage three separate smaller units, each with one tenant paying $1,000 a month.
- Easier to get financing — It's fairly easy to get financing on a single-family rental. Bankers understand them. When you get into multi-unit buildings, it gets a little more complicated. That makes it more difficult and expensive to get financing.
- Longer leases are more common and can lower risk and expenses substantially — Tenant turnover costs time and money. Cleaning, repainting, interviewing, and placing new tenants can be expensive and result in several months of no rent collection. Families seeking single-family rentals often want to sign extended leases. This reduces the cost and cash-flow disruptions caused by vacancies.
But there are also a few disadvantages to owning single-family rental properties.
- More maintenance — Multifamily housing units might share the same roof and walls, but a single-family home has four exterior walls and a full roof to maintain.
- You may incur higher capital expenses — If the home is old and not connected to public water and sewer, you will need to maintain the well and septic.
- Potentially higher risk — Depending on a single tenant to pay $3,000 a month carries a potentially higher cash-flow risk than the chance that three tenants paying $1,000 a month will all skip a rent payment at the same time.
Further Reading: How to Fund Your Real Estate Deals
Single-family Homes Could Be a Good Addition to Your Portfolio
There are many predictions and speculations about the long-term economic consequences of the epidemic. But no one has a crystal ball to see into the future. Frankly, I cringe when I hear news pundits and self-proclaimed pundits predicting a housing bust. As a licensed agent and active real estate investor, I just don't see any signs of the housing market going down.
We had low supply and high demand for homes in most cities before the virus shut down the economy. That requirement has not disappeared. The housing market is in good health and not subject to the easy credit policies and mortgages that caused the housing market crash of 2008.
Paul Moore, co-author of the wealth-building podcast “How to Lose Money” and a frequent contributor to Bigger Pockets content, predicts that single-family rentals will do very well in a potential recession. “There are many individuals and families who choose to rent a home in a particular school district or area, and availability is often limited,” he said.
Real estate is a long-term investment, and a carefully selected, properly maintained, and properly managed single-family rental property can provide income, capital appreciation, and tax advantages. Three things that every investor looks for