Single-Family Homes: The Ultimate Investment Choice?

Investing in a single-family home is a great way to build wealth over time. Single-family homes are standalone properties designed for a single household, whereas multifamily homes can accommodate multiple households within the same building or on the same lot.

Single-family homes are generally considered to be more liquid than multifamily properties. This is due to their lower cost, high demand, and access to a bigger pool of buyers (investors and homebuyers).

Single-family homes are also generally considered easier to manage than multifamily homes. Managing a single-family home involves dealing with a single renter in a single property, whereas managing a multifamily property entails dealing with several renters, collecting more rent payments, maintaining multiple units, and addressing more complaints.

Single-family homes typically have lower purchase prices and require a smaller down payment. Financing a residential property is also easier to get, making them more accessible to first-time investors or investors with limited financial resources.

However, multifamily properties have greater income potential and are less vulnerable to vacancies than single-family homes. Owning multifamily investment property reduces vulnerability to vacancies. In the event that a renter decides to leave, you will still have other renters generating income in the building. In contrast, with a single-family home, your rental income depends on a single renter. If they leave, your occupancy rate drops to 0%, and you risk going for months without any rental income.

Higher rent payments

Single-family homes can be rented out for much more money than an apartment. However, apartment buildings generate multiple rent cheques. These cheques come with a lot of extra duties and responsibilities.

Single-family homes are also more likely to have tenants who pay their rent on time. People renting a house are more likely to stay longer. You won’t have to deal with turnover, empty space, or interviewing potential renters. People renting your house will consider it their home and treat it better.

In a single-family home, you will only have to deal with one person or family. In an apartment building, you have multiple personalities to deal with and they may not get along with each other. You will have to intervene in squabbles and complaints.

Single-family homes almost always have a yard where kids can play. There may be room for a garden or a play structure, making the home more desirable to renters. People want yard space for their families. Plus, the more the kids play outside, the less likely they will be to damage your house.

Single-family homes have only one furnace, one laundry machine and maybe two toilets. Multiple-family dwellings have multiple appliances and fixtures that will need your attention. This can be expensive, frustrating, and time-consuming. Your tenants in a single-family home might take care of some of these things themselves, too, and you will have fewer things to worry about.

Single-family homes are also a great investment to generate passive income. Whether you become a landlord or work with a property management company, you can collect rent payments with minimal active work.

Faster appreciation

Single-family homes are a great way to invest your money, and they come with the added benefit of faster appreciation. Here are some reasons why single-family homes are a good investment option and why they appreciate faster:

Higher Rent Payments

Single-family homes can be rented out for higher amounts compared to apartments. While apartment buildings generate multiple rent checks, they also come with extra duties and responsibilities. With a single-family home, you can expect higher rent payments and fewer headaches.

Lower Risk

Single-family homes generally cost less than multiple-family units, making the investment less risky. Your mortgage will be more manageable and can often be covered by the tenant's monthly rent payments. This makes it easier to build equity and generate cash flow.

Tenant Utility Payments

When renting out a single-family home, tenants are typically responsible for all utility payments, including water, gas, and electricity. This reduces the financial burden on the landlord and ensures that tenants are mindful of their utility usage.

Better Quality Tenants

House renters tend to be more responsible and considerate than apartment dwellers. They are more likely to take better care of the property, pay rent on time, and stay for longer periods. This reduces turnover rates and the hassle of interviewing potential renters.

Outdoor Space

Single-family homes usually have yards, providing space for children to play and families to spend time outdoors. This additional space makes the home more desirable to renters and can help reduce indoor damage.

Fewer Fixtures and Appliances

Single-family homes typically have fewer appliances and fixtures than multiple-family dwellings, resulting in lower maintenance costs and fewer repair headaches. Tenants may even take care of minor repairs themselves, further reducing your responsibilities as a landlord.

Do-It-Yourself Management

Managing a single-family home is much easier than managing an apartment building. You can handle occasional repairs yourself or establish relationships with local professionals for more significant issues. This eliminates the need to hire a property manager, saving you time and money.

Lower management tenants

When it comes to managing tenants, single-family homes are generally considered to be easier to manage than multifamily homes. This is because managing a single-family home only involves dealing with a single tenant or family, whereas managing a multifamily home means dealing with several tenants, collecting multiple rent payments, maintaining multiple units, and addressing a greater number of complaints and issues.

Single-family homes also tend to have lower tenant turnover rates. Tenants in single-family homes tend to stay for an average of three years, while tenants in multifamily homes, such as apartments, tend to stay for roughly half as long. This means that landlords of single-family homes spend less time marketing their rentals, screening applicants, and onboarding new tenants.

However, it is worth noting that managing multiple single-family homes in different locations can be challenging. In such cases, it may be necessary to hire a property management company to efficiently manage the properties, even if they are spread across different locations.

Additionally, single-family homes may require less maintenance since most of the cleaning and upkeep are typically done by the tenants themselves. However, single-family homes may have higher repair costs per unit, such as replacing a roof or driveway.

Overall, if you are looking for lower management tenants, single-family homes may be a better option as they generally involve dealing with fewer tenants and have lower tenant turnover rates.

Hybrid investments

Hybrid real estate investing is a strategy that combines the benefits of the two most popular real estate investing methods: "flipping" and "buy and hold". The aim is to maximise profits while minimising risk.

The "flipping" method involves buying a rundown property, renovating it, and then selling it for a profit. This can be lucrative but is also a risky and demanding job. On the other hand, the "buy and hold" strategy involves purchasing a property and renting it out over a long period, allowing the landlord to benefit from cash flow, appreciation, tax advantages, and loan paydown.

Hybrid real estate investing takes the high-profit potential of flipping and combines it with the benefits of the buy-and-hold method. This means that investors can benefit from cash flow, appreciation, tax advantages, and loan paydown without having to deal with the usual drawbacks of being a landlord or the risks of flipping.

Hybrid real estate investing can be achieved through investing in hybrid real estate investment trusts (REITs). These are a combination of equity REITs, which own properties, and mortgage REITs, which invest in mortgage loans or mortgage-backed securities. By diversifying across both types of investments, hybrid REITs aim to reduce risk and provide a more stable and flexible investment vehicle.

For example, a hybrid REIT might invest 70% of its assets in properties and 30% in mortgages. This allows the REIT to benefit from rental income as well as interest from loans, providing a balanced income stream. Hybrid REITs can also shift their investment focus between properties and mortgages based on market conditions, allowing them to take advantage of higher rent yields or more favourable loan interest rates.

When implementing hybrid REITs into an investment strategy, it is important to consider them as part of a broader investment strategy and to take into account risk tolerance and investment horizon. It is also crucial to carefully review the REIT's portfolio, management team, and track record.

Tax breaks

When it comes to tax breaks, there are several benefits to investing in a single-family home. Here are some key paragraphs to consider:

Operating and Owner Expenses

Ordinary and necessary operating expenses for managing and maintaining a rental property are tax-deductible. This includes property management fees, repairs and maintenance, homeowner and landlord liability insurance, utilities paid directly by the landlord, and professional service fees such as accounting or legal services. Even when hiring a local property manager, owners may still be able to deduct certain expenses to reduce taxable income. These can include continuing education expenses, dues for real estate investing clubs or business periodicals, and tuition for relevant courses. Travel expenses for business purposes, as well as auto expenses related to travelling to the property, may also be deductible.

Mortgage Interest

Mortgage interest paid on a loan used to purchase a rental property is fully tax-deductible. Interest paid on credit card balances and money loaned to the company by members of an LLC are also deductible.

Depreciation

The IRS allows investors to depreciate rental property over 27.5 years to account for wear and tear. Land cannot be depreciated, but the cost of the home and items that increase the cost basis, such as a new roof or appliances, may be depreciated. Depreciation can be calculated by dividing the cost basis by the property's expected life and then computing an annual depreciation expense. This deduction helps lower taxable income.

Capital Gains Tax Deferral

Capital gains tax and depreciation recapture tax can be deferred by conducting a 1031 tax-deferred exchange. This allows investors to sell a rental property and reinvest the proceeds into another rental property of equal or greater value, deferring capital gains tax on the original property.

FICA Tax Exemption

Income from rental properties is generally not classified as earned income, so it is exempt from FICA (Social Security and Medicare) taxes. This can result in significant tax savings for self-employed individuals, as they would otherwise be responsible for both the employer and employee portions of these taxes.

Pass-Through Deduction

Real estate investors may be able to take advantage of the pass-through deduction, also known as the qualified business income (QBI) deduction. This allows them to deduct up to 20% of their qualified business income (QBI) on their personal taxes. Rental income is often considered QBI, and the pass-through deduction can provide a substantial tax benefit.

Frequently asked questions