My wife’s best friend, Tracy, recently said she was quitting her corporate job to become a real estate investor. Tracy had been talking about it for years and finally felt she was ready to leave the security of her regular paycheck behind. But, before she took the leap, she wanted some advice on whether buying single-family homes as investment property was the best real estate niche to get into. She knew investing in single-family residences were my specialty and wondered why. I’m glad she asked. It’s important to know your strategy before you begin investing, rather than find yourself in a niche by happenstance. So, we talked about what makes investing in single-family homes my preferred strategy and why she might want to adopt it as her own.
Why Buy Single-Family Homes as Investment Property
When I started investing years ago, I was told that creating diversification in my real estate portfolio was more important than specializing. The investor who gave me that advice did pretty well for a time buying and renovating property in each of the three main housing sectors, so I get where he was coming from. But, he ultimately ran himself, and his business, into the ground by underestimating the risks of each sector and stretching his finances too thin. The investors who chose a niche, however, stayed in the game longer. Some of them, like me, are still playing.
So, I told Tracy that I was impressed that she was already one step ahead by thinking about specializing. Then, I briefly went over the housing sectors that most investors focus on so that she could make her own decision about which real estate niche was the best for her.
One of the main benefits of owning and renting out multi-family units is that they provide a stream of passive income after the mortgage and operating costs are paid. And, with multiple tenants paying rent, your risk is spread over multiple units in the event of a vacancy. There’s also the benefit of appreciation, which can be upped if you buy an undervalued or mismanaged property and add upgrades—like security cameras or a dog park—that can potentially increase revenue and, thus, the value of the property. Additionally, in some cities where the cost of homeownership is expensive—due to high property taxes, for example—rents can often be raised in response to an increase in demand, making multi-family a potentially lucrative sector to buy into.
That said, there are some drawbacks to investing in multi-family units. In some cities, for example, multi-family units—particularly luxury apartments—are overbuilt. Whereas, in others, there’s actually a shortage, especially of large apartment buildings with affordable units. So, if you invest where the supply outstrips demand, or where units aren’t priced affordably enough to begin with, you may have to lower the rents to attract and keep residents. This, as well as prolonged vacancies, the cost of regular upkeep and repairs, and the overall expense of being a responsible landlord, can make your passive source hard to maintain.
The appeal of the luxury sector resides in its promise to provide larger returns than buying, renovating, and selling older, smaller, “uglier” houses. And, if you buy at the right time and in an area that historically experiences less market volatility, your chance of seeing a sizeable ROI increases—especially if you can hold the property for several years. Even if the housing market takes a downturn, it’s still possible to realize good returns down the line, if you aren’t forced to sell right away, since the luxury sector tends to bounce back.
But, because luxury homes are expensive to buy, renovate, and maintain, a higher sales price doesn’t necessarily equal bigger returns. Luxury homes also tend to linger on the market longer than other properties because fewer people can afford them. This can stall your cash flow and, as a result, your ability to purchase more properties. Additionally, the glut of inventory in certain areas, like Chicago, could force you to sell at a price that limits your expected returns and your chances of investing again.
Compared to multi-family units and luxury houses, investing in single-family homes offers potentially less risk and potentially better returns. For example, the short time horizon of flipping a single-family house—usually only three to nine months—allows you to take advantage of current home values when you sell instead of gambling on an unknown future market. And, because there are typically more buyers for renovated properties in up-and-coming neighborhoods than there are for luxury houses in higher-priced areas, you have a better chance of selling quickly at a price you are comfortable with.
Of course, there are always risks to investing in any residential property. But, these can be mitigated by performing inspections, buying at the right price, renovating with your target buyer in mind, and correctly valuing the property when you sell.
Determining which real estate investing niche works best for you will take some critical thinking. So I recommend that you create a real estate investment plan to help clarify your personal and professional goals. I made the same recommendation to Tracy and she took my advice. In doing so, she was able to clearly see that flipping houses is a good business strategy overall, as well as the best option for helping her reach her financial goals. Her only concern was where to find the best distressed homeowner leads so that she could have more opportunities to buy single-family homes. So, we talked about that too.
Position Yourself for the Best Investment Opportunities
Years ago, when I first started investing in real estate, I was also concerned about finding the right niche and the best leads. Eventually, I figured out that by staying focused on buying single-family houses as investment properties, I’d become the kind of expert that home sellers, home buyers, and even other industry pros would come to trust and respect. But, what I couldn’t figure out was how to find enough investment opportunities to grow my expertise—and my business.
That’s why I became an independently owned and operated HomeVestors® franchisee. HomeVestors generates leads on motivated sellers through the nationally-recognized “We Buy Ugly Houses®” ad campaign and those leads are given to franchisees, like me. So, my concerns were quickly put to rest. And my investing career was finally positioned for growth.
Take my advice and contact HomeVestors for the opportunity to become an expert in your real estate investing niche today.
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