You can often hear discussions at local real estate investor clubs about the relative merits of investing in single-family homes or in multifamily homes.
With the trends today, single-family homes are proving to be the best for many real estate investors, according to veteran investor Larry Arth.
In a recent interview, Arth set out the reasons single-family homes for rent work so well for so many investors.
“If you find a need and fulfill it, you have a good business.” Based on that statement, “There has proven to be such a need for single-family homes for rentals. That is primarily because the large majority of people who are renting right now are indeed families, and families like to live in houses so they are independent,” Arth said.
“The typical family now is two adults, two children and a dog and 70 percent of all people who live in a single-family home want a pet. So a home works really well for that.
“Typically it is your lower-income to middle-income people who are renting these homes. The home are small-to-medium-sized, entry-level types of homes. Typically they are found in an upcoming and coming area where there is a huge demand. I think the hedge fund people found that out. They bought with the mindset that they were going to buy these homes, hold them for a year or two, maybe do a little fix-up up and then flip them in a couple of years for a huge profit. But they found so much sustainability in the cash flow that many of those hedge fund managers decided to actually hold those single-family homes in the portfolio because it is such a safe, sustainable investment for them.”
Investors need to understand the “family” is key to single-family rental success
Finding that need families have, and fulfilling that need is the key. “There are so many more renters now. Recent studies show homeownership has been declining and might go as low at 60 percent before it levels off. That means many more renters. And the largest share of increase of those renters are families. Individuals might like to live in apartments because it is cheap and affordable but now the biggest pool of renters are families. So, the single-family home works very well for them.”
“What happened is the “basement kids” – adults who were living with mom and dad have moved out and created new households that will typically end up in an apartment unless they are higher income producers- they might have good-paying jobs. A lot of those folks are also renting – It depends on their objectives. A lot of people are holding off marriage now and they don’t need as much space so a lot of them are renting and going into apartment-style living as well,” Arth said.
But a large majority of the renters are families and they are looking for that single-family home.
Difficult to scale up single-family?
“If you are looking to scale up quickly and you are looking for quick cash flow, an apartment will work better,” Arth explained. “But a single-family home is the most liquid of properties. So that creates a much better exit strategy. In an apartment investment, your exit strategy is to sell to another investor and the property only goes up in value based on the income it has generated.”
“But a single-family home, before they put it on the market, sellers will typically do a little fix-up or cosmetic repair. And you can sell to a much larger pool of retail buyers. It can be the first-time buyer, it can be the empty nester, it can be a move-up buyer or anybody in between. Maybe even another investor. The buying lot is so much bigger, so it is basically a retail buyer where you can get a retail price for the single-family home.”
“And at the end of the day you have a nice, sustainable cash flow and a larger equity build and I think most investors are identifying that,” Arth said.
How Larry got started in single-family rental homes many years ago
After investing in multi-family properties for the first 10 years of his investing career, Arth grew more interested in the sustainable cash flow and equity growth that single-family homes provided. While Arth said the multi-family properties provided him the quick scale up at the time, he wanted to move to a more simple business operation that he was able to achieve with single-family properties.
“I actually took equity out of a fourplex to buy two different single-family homes and a condo,” he said about his very first single-family rental purchase.
“The very first one I bought I paid just over $100,000 for back in Minnesota. It was a beautiful little three-bedroom, two-bath, two-car garage house I rented for $1,495 a month. I held it for four-and-a-half years.”
“I sold it after I moved to Florida because the tenant wanted to buy it. That is another reason I like single-family homes because a lot of times you can sell them to the tenant and create a win-win for both of you,” Arth said.
Also, with a sale to a tenant you “create a stronger cash-out at the end of the day because you do not have all those liquidation expenses. I sold that home about four or five years later to the tenants for a $42,000 profit. It was very lucrative,” Arth said.
Investors wanting to learn more about single-family investing may want to consider an upcoming conference in early December from IMN. Find out more here.