What is Single Family Real Estate?
Single family real estate is property that consists of only one unit, and thus will only have one family living in it. Single family real estate includes structures such as detached houses, condos, townhouses, cottages and cabins. In contrast, multi-family real estate is property that has more than one unit, and thus more than one family living on the premises. An apartment building with 40 units, for example, would fall under the category of multi-family real estate.
Both multi-family and single family real estate offer income-producing investment opportunities, but this article will specifically explore the process of purchasing a single family property. Investors can buy single family real estate, such as a townhome, and earn income by renting out the property to tenants. The investor may also later receive a return on the property through capital appreciation.
A single family real estate purchase is a highly tangible investment: as opposed to stocks, the investor can literally touch the structure and land they buy. However, with this tangibility comes a management and maintenance responsibility that does not exist with stocks and bonds.
What are the Advantages and Disadvantages of Single Family Real Estate?
Purchasing single family real estate offers a number of advantages when compared with multi-family real estate purchases:
- It is generally more affordable to buy a single family home than a multi-unit building.
- Single family real estate investments provide slow, but steady growth.
- They typically appreciate faster than multi-family properties, depending on the region.
- There may be more potential buyers when it comes time to sell the property. This makes single family properties more liquid.
- There is only one tenant to oversee on the property.
- There is less maintenance and upkeep costs required since there is only one tenant.
On the other side of the spectrum, single family properties have certain disadvantages in comparison with multi-family real estate. These include, but are not limited to:
- Do not provide as much cash flow, since there is rent from just one unit.
- Can be riskier, since there is only one tenant—if they vacate the property, the owner is solely responsible for the mortgage and other costs.
- Smaller pool of renters, since the rent will generally be higher than an apartment, and the properties are generally located in lower density areas.
For many investors, single family real estate constitutes just one investment in their greater portfolio.
What is the Process of Purchasing a Single Family Property?
Select the market and investment type
Single family properties can be purchased in two ways: on the public market or on the private market. As explained in “What Is an REIT,” investors have the opportunity to purchase real estate through publicly traded real estate companies called REITs. Some REITs have portfolios entirely dedicated to residential single family properties. By buying a share or unit in such a REIT, the investor can receive income from those properties.
Investors in an REIT receive the collected rental income in the form of dividends. However, since the real estate company manages the properties on behalf of the investors, this is a more indirect, hands-off method of purchasing a single family home. Investors should research the REIT’s holdings and filings before investing, along with the company’s management team and access to capital.
Purchasing single family real estate on the private market is a more direct option and the route most investors will be familiar with. In this scenario, the investor purchases a direct interest in a single family real estate property, and then owns and operates that piece of real estate.
An investor must make an equity investment, rather than a debt investment, in order to actually own the property. A debt investment means the investor is simply lending funds to the owner of the real estate, and then receiving interest payments and a mortgage. In contrast, making an equity investment means the investor is the single family property owner, and stands to gain more if, for example, the rent can be increased. There is also a higher risk involved with an equity real estate investment—for example, if the tenants move out, the investor must cover the costs during the vacancy.
Research the local market
Once an investor understands what their single family real estate investment options are, and if they decide to purchase on the private market, they can then begin the process of selecting a property best suited to their investment goals. The first step is to research and understand the market where the real estate will be purchased. This includes finding out if rents in the area are rising or falling, finding out the rates for maintenance services like painting and plumbing, and checking the U.S. Bureau of Labor Statistics’ website for information on the local unemployment rate.
Analyze the numbers
The next step is to find out what the monthly cash flow will be if the single family home is purchased and rented out. Cash flow is the monthly profit an investor makes after all expenses have been paid, including mortgage, taxes, insurance, utilities, repairs and more. Once the investor compares expenses against the rent received per month, knows what price they want to pay for the property, and understands whether the purchase would provide a good return on their investment, they can proceed to make an offer to the seller.
Make an offer and close the deal
Before making an offer, every investor should have a clear understanding of how they are going to pay for their single family real estate purchase. There are a number of financing options available, such as utilizing a traditional loan from a bank. Which option is best ultimately rests on the investor's individual financial goals.
Once the financing strategy is clear, the investor can make an offer on the respective property. This step is dependent on how they found the property. If, for example, the unit was found directly through a private seller, the investor would make a verbal offer to seller, and then a more formal offer in a Purchase and Sale Agreement. If the property was found through a real estate agent, the agent would instead submit the investor’s offer. The final step is to negotiate and close the deal. Investors may choose to hire an attorney to review the closing documents and to notify them of any potential problems in the paperwork before signing.