Thinking about investing in real estate? You have plenty of choices: commercial properties, debt or equity investments, and residential property flips are just a few. Among these, single-family residential properties stand out as a popular option for investors and renters.
Before you take the plunge, it's crucial to weigh the key factors involved.
Why residential real estate?
Residential real estate generally includes housing units for one to four families. It’s common for duplexes or triplexes to have one unit owner-occupied and the others rented out. Residential real estate also includes condos and townhomes.
Residential real estate can have a few advantages over other property types:
Larger and more liquid marketplace
Residential real estate can be significantly more straightforward to buy and sell than commercial, industrial, or land. Selling larger commercial, industrial, and land investments is more challenging because the pool of buyers is much smaller. You could sell residential real estate to other investors or a potential homeowner, but you have to find a more specific buyer to sell commercial real estate.
This larger market also has an advantage on the acquisition side. It’s easier to find deals in residential real estate because homeowners and investors value properties differently.
Even though residential real estate is still illiquid, selling and exiting the investment can be significantly more straightforward than other real estate holdings.
Strong ability to generate income
One of the most significant benefits of real estate investing is that it can generate cash while you hold it. The goal of a rental property is to maximize cash flow by having low vacancy rates and turnover.
Residential real estate checks all of the boxes. It can generate income, which is something that undeveloped land doesn’t do. And it potentially has lower vacancy and turnover than multi-family residential, commercial, or industrial properties. Tenants in single family rental properties stay for an average of three years.
Even in recessions, people need a place to live. Residential real estate doesn’t often correlate with the business cycle in the same way that commercial properties like hotels or retail can.
Why single family residential properties?
Understanding how the market performs nationwide can help you decide if this asset class suits you.
Undersupply of single family homes
The U.S. housing supply is severely underbuilt. Freddie Mac estimates that 1.5 million homes are undersupplied in the American housing market. We simply have not been able to build enough homes to fill the demand.
We’ve also been building fewer homes. This chart shows how little we’ve built over the last few decades.
New home construction is higher than its all-time low in 2009, but not by much compared to historical standards.
Strong demand and appreciation
More demand for single family homes gives them a significant advantage over condos, duplexes, and townhomes.
According to a Freddie Mac study, most renters live in single family homes.
Why light remodels?
You have several options if you want to purchase a single family residential home. You could:
- Build new
- Purchase a “turn-key” property that is tenant-ready
- Purchase a complete fixer-upper and remodel the property before leasing
New development and remodels can be great ways to create value in a property. However, there’s also a lot of risk. There can be delays in permitting, unexpected costs, or construction issues.
On the other side, there’s true “turn-key” rental property investing. This involves buying a property already in good shape and ready for a tenant. This kind of investment can have lower risk but potentially lower returns. It’s hard to buy these assets at a reasonable price because the previous owner was already maximizing the property's cash flow.
Then there is what Arrived calls the Goldilocks approach: Investing in properties that only need light remodeling work before they’re ready for a tenant. This can be the best of both worlds. You can potentially improve the home and capture additional value with certainty on the costs and timeline of the work.
Single family residential properties can have a lot of advantages for investors. There is the potential for earning a steady income while you grow your initial investment. However, when you dive into available properties, there is a lot to consider. To help you choose, consider your skill level, available time, and the commitment you want to make.
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