Advantages Of Single-Family Income Property – Keith Weinhold
Back when I was 15-year real estate investor, my deals were made up by both single-family income property and buildings.
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The reason why apartments get so much attention by real estate investors is because they create wealth. The economies of scale that apartments have look great when investors analyze the profit-and-loss (P&L) financial projections spreadsheet. The only problem with P&Ls is that they are just that, projections. They do their best to predict the future, but it is important to keep in mind hat they are only predictions.
After an investor has held a property for several years and decides to sell it, very rarely is a forensics report done. That means looking back and making an evaluation on the rate of return. When calculating what actually happened to the property during several years it is important to factor in all expenses, and few actually do that.
However, for buy-and-hold income property, I have often found that the income on single-family residences (SFRs) perform at a higher standard than small to medium-sized apartment buildings. For this exact same reason Warren Buffet mentioned in an interview with CNBC he would be willing to buy “a couple hundred thousand” of SFRs whenever he found it practical.
It is known that apartment buildings have certain advantages over single-family residences. However, let’s tae a look at why it is more profitable to invest in SFRs than in apartment buildings:
- Tenant quality. SFRs are guaranteed to attract a better quality of tenant.
- Appreciation. Properties appreciate better over time.
- Neighborhood. Your property tends to be in a better neighborhood.
- School district. SFRs are more likely to be in a better school district.
- Retention. Tenants tend to stay longer because SFRs “feel like their own”. More frequent vacancy, turnover, and make-ready expenses are an underestimated killer on apartment investor profits. Better neighborhoods and school districts aid tenant retention.
- Common areas. There are no common areas to clean and maintain. Apartments have hallways, stairs, and laundry rooms that a custodian must service. This is another overlooked profit drag that apartment investors miss in their P&L.
- Utilities. In SFRs, tenants often pay all utilities and even care for the lawn. The larger the apartment building, the more likely that you’ll be the one stuck with utility costs.
- Divisibility. What if you’ve got property that’s underperforming? With 10 SFRs, you can sell the one or two that are underperforming. With a 10-unit apartment building, you’ve got to keep all the units or sell all the units. It’s not divisible.
- Pestilence. Apartment building agents and promoters don’t want me to bring this up. If one tenant attracts a cockroach or bedbug infestation – the latter of which is becoming more prevalent – this quickly becomes a diffuse condition across the entire building. I recently had a tenant bring bedbugs into a 9-unit apartment building of mine. Tenants fled. Extermination fees alone were in the 5-figures. In an SFR, pests are more easily controlled.
- Fire. Even if adequately insured, apartment fires affect multiple units and families. With SFRs, this risk is mitigated.
- Drug dealers. We’re really getting nasty by now, aren’t we? In an apartment building, one drug-dealing tenant can disrupt multiple families. Again, apartments attract lower quality tenants.
- Financing. Income SFRs have both lower mortgage interest rates and lower down payment requirements than apartments. A husband and wife can each get 10 SFR loans (20 total) at the best rates and terms through Fannie Mae / Freddie Mac with 20% down payments. There are other financing options once these first 20 loans are exhausted. Apartments rarely, if ever, have 30-year fixed rate terms like SFRs.
- Vacancy rate. It’s true that if your SFR is vacant, your vacancy rate is 100%. If your four-plex has one vacancy, then your vacancy rate is only 25%; but the same is true if you own four SFRs and one is vacant.
- Management. If you hire professional management, your manager would likely rather deal with SFR-dwellers. If you’re self-managing (which I hope you don’t do for long), this is a demographic that you would likely rather handle too.
- Supply and demand. Today, contractors are building many new apartments. They rarely build the low-cost SFRs that make the best rentals. Rental SFR demand vastly exceeds supply. This will continue to be true in both the short and intermediate-term.
- Market risk. This is another overlooked criterion. You must keep your rentals filled with rent-paying tenants that have jobs. Think you’ll be able to buy ten rental units in the near future? Your 10-unit apartment building will only be in one location, leaving you exposed to one metro market’s economic fortunes. With 10 SFRs, you could have four in Birmingham, three in Dallas, and three in Jacksonville. (National SFR property and relationships with reputable property management firms can be found at www.GREturnkey.com.)
- Exit strategy. Years down the road when it’s time to sell your income property (hopefully after years of handsome profits!) there will be a much greater buyer pool for your SFR than your apartment building. More buyers can afford the lower price. Unlike apartments, you even have access to a pool of buyers that might want to occupy the SFR themselves.
Interested in learning more? On Episode 140 of my popular Get Rich Education podcast (Robert Kiyosaki and the Rich Dad Advisors have appeared as guests many times), a guest and I discuss the distinct advantages of investing in single-family income property. I also travel the continent and compile top real estate markets, properties, and property managers at GREturnkey.
Keith’s new #1 International Best-Selling Book reveals the 7 Money Myths That Are Killing Your Wealth Potential, including the epiphany that getting your money to work for you will NOT create wealth! You can now get this e-book FREE at GetRichEducation.com/Book