After taking a beating during the dot-com stock market bubble of 2000, I decided to diversify my investments with real estate. I soon found that there was a bewildering array of options to choose from: Single-family homes, duplexes, fourplexes, professional offices, syndications, REITs and more.
Each of these asset classes have pluses and minuses, and many investors have been successful with each of them, but upon inspection I settled on single-family homes as my safest entry point, for five reasons.
5 Reasons To Invest in Single Family Homes
#1: Lower Price Point
The first advantage of single-family homes is that they had a lower price point compared to other options. At the time, I could buy brand-new homes in Phoenix for $180,000 or renovated homes in other parts of the country for $100,000. This struck me as the easiest way to get started and limit my downside risk. As a new investor, I knew I would make newbie mistakes, so I wanted to make those mistakes with inexpensive properties, not expensive ones!
#2: Higher Appreciation
A second reason I preferred single-family homes is that they enjoy higher price appreciation than other options I was considering such as duplexes and fourplexes.
The reason is that when you eventually sell the property to an owner-occupant who will make it their home, it’s an emotional decision for them. Buyers will bid up the price of the house they want to live and raise their families in, in the neighborhood and school district they want.
On the other hand, buyers of duplexes and fourplexes are typically investors who see the property only in terms of dollars and cents and who drive a hard bargain. The investor has no attachment to the property – if s/he can’t get it he’ll just move on to the next deal.
Additionally, due to zoning, multi-families tend to be located in tenant-heavy neighborhoods made up of small apartments, apartments complexes, etc., While homeowners have pride of ownership and maintain their homes, tenants typically don’t take care of their homes as well. As a result, tenant neighborhoods tend to deteriorate more than single-family home neighborhoods.
While’s it’s true that small multi-family properties cash flow better than single-family homes, my focus at the time was home price appreciation and equity growth.
#3: Easier to Find and Retain Tenants
Single family homes can appeal to a wider pool of tenants than an apartment, such as families with kids and pets and who want a backyard and a garage. Once settled in, those types of tenants tend to stay longer.
By contrast, very few people really want to live in a fourplex. People want to live either in a single-family home where they have some sense of privacy with no noisy neighbors or shared walls, or they want to live in a large apartment complex with amenities like a swimming pool or a fitness center.
Duplexes and fourplexes don’t offer either: They don’t offer the privacy of the single-family home, nor do they offer the amenities of a large apartment complex. It’s like having the worst of both options.
For most tenants, a duplex or a fourplex is just a steppingstone place to live until they find the place they really want to live.
Why would I want to own a property whose tenant’s only thought is to get out of there as soon as they’re able? I would rather own a single-family home and have tenants who are going to stay a while.
#4: Less Legal Liability
With a single-family home, the tenant is responsible for everything: mowing the lawn, shoveling the snow, replacing the batteries in the smoke detectors, etc.
With a multifamily – particularly an upstairs downstairs duplex or fourplex – or a commercial property, the landlord is often responsible for things like common area maintenance, lighting, and snow removal. If those things aren’t maintained for whatever reason, the landlord has more liability – and that’s something I didn’t want.
#5: Multiple Exit Strategies
The final reason I’m partial to single-family homes is the multiple exit strategies they offer. When I decide to sell, I can sell a home to an owner-occupant, to another investor or even to my tenant. With multi-family or commercial property, my only exit is to sell to another investor. As noted earlier, to them it’s just a business decision and they’ll drive a hard bargain.
Another consideration is rent control. If the city where I own SFHs decides to pass rent control laws, I can always wait until my tenant leaves, renovate the property and put it on the MLS for sale to an owner-occupant and get the full value of my property.
With a duplex or fourplex, rent control ordinances would seriously degrade the value of that property to any potential buyers. I would get only low-ball offers – or no offers at all.
Conclusion
You can make money with any real estate asset class but given my personal goal at the time (appreciation) and my risk tolerance (scared-to-death), I was most comfortable starting with single-family homes.
Now that I have a portfolio of performing single-family homes and over a dozen deals under my belt, I’m now exploring duplexes as a way to scale my portfolio faster.
If you’re looking to diversify from the stock market and are new to real estate investing, a bread-and-butter single-family home is the safest way to dip your toe in the water.