Pros And Cons Of A Single Family Rental Property
By JD Esajian on July 29, 2016
There is no right or wrong way to get started in real estate. There is a large contingent of investors who say if you own a rental property it should be a multifamily property. The other side will argue that by starting with a single family you will get an idea of exactly how being a landlord works. In most cases a majority of new landlords start with the single family route. Not only is this the path of least resistance but there is often more supply available in local markets. The reality is that it really doesn’t matter which path you take to get started. You need to be comfortable with your property regardless of the number of units. Single family rentals can yield just as much success as a large four family property. Before you get too far you should know all of the pros and cons with a single family rental property.
PROS:
- Generally speaking a single family rental is easier to maintain. Just by the sheer size of a single family property there are fewer items that need to be fixed. Instead of having to deal with four stoves and multiple bathrooms you only have to worry about what is in one unit. If you replace the toilet today the odds are you won’t have to worry about it again for several years. This isn’t to say you won’t have to update and maintain the property but single family properties have fewer items that can go wrong.
- Most single family properties have a much higher upside appreciation potential. Even though multifamily properties may be larger they are often more difficult to sell. It takes a unique buyer to want to purchase a four family property. While loan programs have improved in recent years they haven’t changed too much for multifamily properties. With an increased down payment requirement the buyer pool is reduced. This has, in part, pushed multifamily values lower. On the flip side single family sales have increased dramatically in recent years. With most markets still not fully taken off there is tremendous upside potential on a single family purchase.
- The monthly cost to run a single family rental is not nearly as high as a multifamily. There are always costs with every property but most of these costs are picked up by the tenant. As the owner you pass off any utility or electric bills to your tenant. In fact the only bill the owner typically covers is the water/sewer bill. You will still have to pay for lawn maintenance and snow removal but all of the large items your tenant pays for.
- The final advantage of a single family property is the multiple options it provides. As we mentioned selling a multifamily property is not easy. With a single family rental you have many more options, especially with increased equity. With even a little equity you can explore mortgage refinance options in adding to home equity lines of credit. If you had to sell quickly you are much more likely to have a quick sale with a single family than a multi. You never know what will come your way and having increased options can only help.
CONS:
- Having to deal with just one tenant is great when things are going well. However when problems arise a lack of other income can be devastating. In a four family property if one tenant stops paying you still have 75% of the property rented. In a single family if your tenant stops you lose 100% of the income. This is often a difficult blow to recover from. The eviction process can be dragged out for several months. During this time you have no income coming in and are forced to cover the mortgage payment. Without ample reserves to brace for this you can go from a cash flowing property to foreclosure in just a few months.
- Another problem with a single revenue stream is that you have limited ways to improve cash flow. Multifamily properties have multiple tenants that often increase the bottom line. With a single family you are locked into the cash flow until the end of the lease. Sure, there are ways to decrease expenses but often times these are fixed and cannot be lowered.
- With a single family property your rental pool is exclusively based on the size of your property. A small single family with two bedrooms and one bath may be too big for one individual but too small for a family. This restricts who you can rent to and in turn how much rent you can receive. Before you buy it is important to know your market and what types of properties are generating interest. One of the mistakes that new investors often make is thinking that any property will make a good rental property. If it is not a good fit for your market finding tenants may be more of a headache than you realize.
In most cases the type of rental property you choose is commiserate with your down payment, how much time you can dedicate to the property and what is available in your market. There are many successful investors who have focused solely on single family rentals for their career. If this is an area that you know and are comfortable with then stick with it for as long as you can.