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Do They Make a Good Investment?

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Rental property investors have long touted the low risk and stability of investing in affordable housing. They point out, “Everyone needs a place to live.” The COVID-19 pandemic proved to be a real-life test of this mantra. In March 2020, landlords found that even when shelter-in-place directives keep people from working, they still pay their rent. Are single-family rental homes make a good investment during COVID-19? Let’s dive in.

Surveys Show: Renters Pay Their Rent

Rental property owners across the country steeled themselves for what was predicted by experts to be at least a few months of unpaid rent. But it turns out there was not much to worry about.

  • In May 2020, Multi-Housing News reported that 87.7% of renters paid full or partial rent. By comparison, during the same time period last year, 89.8% of renters paid their rent.
  • A survey from the Apartment List website provides still more hope. It found that 79% of renters are at least somewhat confident they can afford their June rent. Renters feel they’ll be able to pay even if “shelter-in-place” remains in effect.
  • The research data doesn’t break down any difference in payment trends between apartments, condos, townhomes, or single-family rentals. But there are reasons to believe single-family homes are more resilient to the economic effects of a spike in unemployment like we see with the pandemic.

Investors are flocking to single-family rentals. They see that companies owning huge pools of rental homes are weathering the present crisis far better than feared. Many investors expect single-family homes will become more desirable to live in but also more expensive to buy.

What Is a Single-Family Home?

A single-family home consists of one unit that houses one family. It sits on its own parcel of land, not connected to any other residential structure. In the business, we call these “detached,” since they’re not attached to another home. Typically, they sit on at least a quarter-acre lot.

This type of rental housing tends to have a higher “tenant stickiness.” This means that renters are less inclined to move as often. Single-family rentals increase tenant stickiness for several reasons.

Reasons for Increased “Tenant Stickiness”

  • Privacy — No other tenants above, below or beside you. Tenants, of course, prefer this. No sound of other tenants arguing through thin walls. No kids running nonstop in the unit above. That smell of fish lofting through the building is from your own cooking, not the neighbor’s.
  • More spacious than townhome, condo, and apartment living — The tendency to feel claustrophobic in the space is diminished. That two-bedroom, two-bath condominium sandwiched between units above and below likely felt cramped during the stay-at-home policy.
  • Personal involvement in property upkeep increases emotional attachment — Single-family living provides an emotional attachment to the property. Tenants get to plant the flowers they like, add their own patio furniture and watch their kids play in the yard. It’s their home, not just a place to rent.
  • Available and free on-site storage — Americans have a lot of stuff! A single-family home provides more storage space than in other types of housing: attics, basements, sheds, closets.
  • Feels more like a home than a rental unit — There is often larger inside space, as well as outside space like a yard or patio. Tenants with pets and small children tend to become more permanently set up in a single-family home where there’s a fenced-in yard for the kids and dog to romp and play.
  • School stability — Single-family homes attract families with children enrolled in schools they want. Changing schools is a huge disruption for children and parents — and avoidable if they stay put.
  • Other conveniences — Single-family homes provide amenities and conveniences not always found in other rental options. These include off-street or even garage parking, a washer and dryer in the unit, and additional living space.

Pros & Cons of Single-Family Home Rentals Over Condos, Townhomes, and Duplexes

Pros

In addition to “tenant stickiness,” there are other advantages to single-family home investing.

  • Higher market appreciation potential — In many areas of the country, single-family homes benefit from higher long-term market appreciation than other types of housing. Appreciation is one of the biggest benefits of real estate investing and vital to wealth creation from real estate holdings.
  • Monthly cost savings — The monthly cost of owning and renting out a single-family home can be less, as there are no monthly condo fees. And HOA fees tend to be less common and lower on single-family homes (although these things vary and depend on local market dynamics, of course).
  • Easier to manage — It’s much simpler to manage one property housing one family paying $3,000 a month than it is to manage three separate smaller units, each with one tenant paying $1,000 a month.
  • Easier to get financing — It’s fairly easy to get financing on a single-family rental. Bankers understand them. When you get into multi-unit buildings, it gets a little more complicated. That makes it more difficult and expensive to get financing.
  • Longer leases are more common and can lower risk and expenses substantially — Tenant turnover costs time and money. Cleaning, repainting, interviewing, and placing new tenants can be expensive and result in several months of no rent collection. Families seeking single-family rentals often want to sign extended leases. This reduces the cost and cash-flow disruptions caused by vacancies.

Cons

But there are also a few disadvantages to owning single-family rental properties.

  • More maintenance — Multifamily housing units might share the same roof and walls, but a single-family home has four exterior walls and a full roof to maintain.
  • You may incur higher capital expenses — If the home is old and not connected to public water and sewer, you will need to maintain the well and septic.
  • Potentially higher risk — Depending on a single tenant to pay $3,000 a month carries a potentially higher cash-flow risk than the chance that three tenants paying $1,000 a month will all skip a rent payment at the same time.

Single-Family Homes Could Be a Good Addition to Your Portfolio

There are lots of forecasts and speculation about the long-term economic effects of the pandemic. But nobody has a crystal ball to see the future. Honestly, I cringe when I hear news pundits and self-proclaimed experts predicting a housing recession. As a licensed agent and active real estate investor, I just don’t see indications of a housing market crash.

We had a low supply, and high demand for housing in most cities before the virus closed down the economy. That demand hasn’t disappeared. The housing market is healthy and unencumbered by the loose lending policies and subprime mortgages that led to the housing market crash in 2008.

Paul Moore, co-host of a wealth-building podcast, called “How to Lose Money,” and a frequent content contributor on Bigger Pockets, predicts that single-family rentals will fare very well in a possible downturn. “There are many individuals and families who prefer to rent a home in a particular school district or area, and availability is often limited,” he said.

Real estate is a long-term investment and carefully selected, appropriately maintained, and properly managed single-family rental properties can provide income, capital appreciation, and tax advantages. Three things every investor looks for.

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