Small MarketS
Single Family Homes vs Multi-Family Homes
By Scott Sklare
As an investor, real estate broker, advisor, and owner of a property management and rehab company, I am often asked, what I prefer: Single Family Homes (SFH) or Multi-Family Homes (MFH). My honest answer is “it depends!” I happen to prefer SFH, but I invest, own, and manage both types. In reality, there is no right or wrong answer.
Most everyone knows something about houses. Most everyone has an opinion about what prices are doing – or tell you about a good deal they or someone else got on purchasing their personal residence. Amazingly, only a tiny percentage of the population invests in houses. Most recently, the large investment houses have started buying single-family homes in select markets and that should tell you something.
This article is about the benefits of investing in SFH in a relatively small market. I reside in south-central Wisconsin, and the specific Metropolitan Statistical Area (MSA) that I am going to use as an example is Janesville-Beloit, Wisconsin. Relative to my earlier comment regarding large investment houses – a market like Janesville-Beloit is somewhat “under the radar.” Very few large investors have heard of it, or paid attention to it, and that is a good thing.
Why Single-Family Houses are a Great Investment
After 40 years of real estate investing, I much prefer houses vs apartments. I believe that houses make more money with less work than other real estate investment types.
That is probably contrary to most gurus’ opinions. I own and manage both. The tenants in apartments come and go more often – higher turnover. Most every time a tenant moves, the unit requires more work on my part to get it “rent ready” for the next tenant. Tenants in apartments tend to be more demanding. I get more complaints about the neighbors, such as, “my neighbor is smoking cigarettes, my neighbor is smoking marijuana, my neighbor is loud, noisy, messy…”
House tenants are significantly different. I find that house tenants treat the house as if it were their own. In all likelihood, it is a family that is on a quest to buy their own home and is grateful to be living in their “own/rented” home. As a result, house tenants stay longer — on an average of three to five years. That is important to note — a long-term tenant reduces your maintenance and vacancy expenses. I do not have to repaint, clean, or replace flooring until they leave.
If you happen to be an investor and a licensed real estate agent/broker — that tenant may turn into a buyer for you someday. If you treat them right, they will hire you to be their buyer agent, providing an additional, built-in stream of income.
Another reason I prefer SFH is that houses maintain their value whether they are occupied or not. Apartment building value is predominantly determined by the amount of income it produces. Houses are more liquid. You can buy a house with a smaller down payment. There are many more buyers for houses than for bigger properties. You have both investors and families looking for their personal residence. Apartment vacancies are typically 10% whereas house vacancies rarely exceed 5%.
Analyzing the Small Market Demographics
Prior to investing in any given geographical area, town, or city, it is in your best interest to look at some key factors; geography, demographics, education, industry, largest employers, households, business conditions, employment/unemployment rates, and so forth. In a nutshell, you want a stable economy and a stable workforce with a variety of industries that will represent a good and healthy rental market.
First a little bit about the MSA. Janesville-Beloit is just about a straight shot, 45-60 miles south of the state capital, Madison, Wisconsin (state capital and home of the University of Wisconsin).
Here is some basic demographic information:
Median Age » 40
Ethnicity » Caucasian — 80%, African American — 10%, Hispanic — 10%
Education (Post-secondary) » 55%
Household size » 2.6
Median Home Value » $147,000 (35% within $90,000-$130,000)
Median Household Income » $59,000 (50% earn between $35,000-$100,000)
Estimated net worth » $129K
Renters vs Owners » 35% renters, 65% owner-occupied
Employed population » 50,583
Unemployment rate » 3.8%
Households » 42,333
# of businesses » 3,360
Economic Development Activity
Economic development activity is an important consideration when investing. Most recently Amazon, Staples, and Dollar General built 3,000,000 square feet of warehouse space and created over 1,500 new full-time jobs. The jobs represent industry-leading pay and comprehensive benefits packages. Capital investment exceeded $200 million dollars.
There is a sizable segment of the population that rents and has a household income of $59,000. Again, at a high level, that means that a large portion of the population will qualify for a monthly rental rate of $1,200 to $1,500.
A Real-Life Example – The Return On Investment
Let’s conclude with an example of buying a Single-Family Home, Long Term Rental in a small market, specifically, the Janesville-Beloit Wisconsin market.
Property Information
» 3 bedrooms
» 1 bath
» 6 total rooms
» 1.5 stories
» 1100 finished sq ft
» .13-acre lot size (roughly 40×120)
» Centralized location
» Forced air furnace
» Municipal water/sewer
» Fresh paint
» New flooring
» New counters, new sinks
» Open floor plan
» Property Taxes — $764
Year 1 Analysis
Purchase $89,900
Closing $1,000
Repair $0
Total $90,900
Down Payment $17,980
Loan Amount $71,920
Amortization 30 years
Interest rate 4%
Monthly P&I $345
Annual Income $14,414
Annual Expenses $9,005
Annual Cash Flow $5,410
Cash on Cash ROI 28.5%
Equity $19,696
Annualized Return 32%
Prior to making an investment decision, real estate investors have many factors to consider regarding asset type, market size, financing options, etc.
By carefully conducting “Real Estate 101” due-diligence and collaborating with a local advisor who is knowledgeable about the local area and market, the investor can minimize risk and achieve returns that surpass other investment opportunities.
