Investing In A Single-Family Home? Read This First
More than 12 million single-family homes are currently being rented in the United States. Those homes make up 35% of all rental housing around the country. But just because some 1 properties are successful, doesn’t mean everyone is. To help you decide whether or not you should invest in a single-family home property in your area, we’ve compiled a list of the top factors to consider (and yes, the first three are: location, location, location).
Our goal at Invest Nest is to better arm you with the knowledge you need to enhance your chances of success when diving into real estate investment so let’s take a look at a few factors to consider when looking at single-family homes as a potential investment strategy.
-LOCATION, LOCATION, LOCATION-
You’ve heard it a million times in the real estate world, and it’s for good reason. Location is often the deciding factor that will cause a property to appreciate or drop in value.
No matter how much money you pour into remodeling a house, you will never be able to change the amenities and infrastructures around it. That’s why we recommend looking for a home with a good school district, nearby public transportation, and shopping close by.
If you can find a less expensive home in a nice neighborhood, that’s even better, since the nicer homes around your rental property will appreciate your home’s value over time if you eventually decide to sell.
Single-family homes also typically have tenants with children who stay longer as compared to tenants in an apartment or multi-family units, making the location even more important.
Real estate investing is a business. Any business makes capital decisions based on ROI or return on investment. The faster you recoup your initial cash outlay, the safer and more profitable the investment becomes. One of the fundamental measurements of ROI is the cash on cash return, which tells you how much of your down payment you’ll be able to recoup as cash per year.
Here’s how to calculate this metric:
Cash on Cash Return = Net Income ÷ Initial Money Down
For example, let’s say you purchase a single-family rental property for $100,000 and you make a 20% downpayment of $20,000. Your closing costs for the home were $5,000.
After mortgage payments, repair fees, and factoring in vacancies or property
management teams, you pay $800/month.
You find a tenant who rents the home for $1,000/month. This makes your cash flow $200/month, giving you a net income of $2,400 for the year.
"The Decline in Owner-Occupied Single-Family Homes - CityLab." 4 Oct. 2019, https://www.citylab.com/life/2019/10/single-family-house-rental-recession-homeowner- management/5993
71/. Accessed 23 May. 2020.
Net Income: $2,400
Initial Money Down: (Down Payment, Closing Costs and any Initial Repairs) $25,000 Cash on Cash Return = 2,400 ÷ 25,000
Cash on Cash Return = 0.096 or 9.6%
Good cash on cash return typically ranges anywhere from 8-12%.
-Rental Value Comparisons-
What are other houses renting for in the area? A quick online search can give you valuable insight.
Many investors follow the 1% rule where rent needs to be at least 1% of the purchase price (plus costs of any needed repairs) of the home. This is a general rule of thumb, and there are exceptions depending on your real estate goals, but it is a good rule to follow for beginner investors.
For example, if you purchase a $100,000 home, it should rent for $1,000/month for it to be a worthwhile investment. Some investors say it should be closer to 2%, and obviously, the more you can rent it for, the better! Again, it is very important to have a solid understanding of your local rental market and any additional costs that might arise.
The demand for single-family investment properties is continuing to rise. By analyzing rental prospect locations, doing some math, and property comparisons, you can be sure to make a great investment that will benefit you for years to come.
Our team at Invest Nest is currently working hard to put together more content and useful resources to help you grow your own real estate investment endeavors so be sure to check back in with us over time.
We’d love to hear what other factors you consider or questions you have before investing in a single-family home. Comment below!