The Risks and Rewards of Investing in a Single Family Home
From a cash flow point of view, investing in a single family home is the best way to go if it is purchased at a good price with a trustworthy, long-term tenant who treats your property with respect and always pays the rent on time. However, there is seriously nothing more terrible than investing in a single family home that is continuously vacant, damaged by previous tenants, and in need of constant repairs.
Pros
Expenses and Cashflow
One of the best things about owning a single family home is that most of your expenses are paid by somebody else. The tenants basically make your mortgage payments while maintaining your property which appreciates in value. Good tenants will treat your property as if it’s their home. If you structure the lease correctly, they pay the utilities and maintain the yard. Though you will still be responsible for the taxes, insurance and HOA payments, you can write these off as expenses on the home. The best case scenario is finding a rental property that has enough cash flow that all of these expenses can be paid out of the tenant’s rent, and there’s a little leftover. You then have a property that has cashflow, and is growing in value with tax write-offs that are all paid by somebody else!
Leverage
Probably the best reward of owning a single family rental home is that you can leverage your money. I can illustrate this best with an example. If you have $20,000, you can buy a $100,000 home and finance $80,000. Because the value of your home is $100,000, it will appreciate, or increase in value based on the full amount even though you have only invested $20,000. Historically, homes increase in value by 2.5%, so every year this home would increase in value by $2500. This is especially rewarding if all expenses are paid by tenants.
Cons
Vacancies and Bad Tenants
Vacancies are a part of any rental property. Because tenants move, it’s important to have enough capital that you can pay all of the monthly expenses if this happens. Probably the biggest risk of owning rental properties is being stuck with tenants that don’t pay or don’t take care of your home. Most states allow only a certain amount to be paid for a security deposit, so you can’t always count on it being enough to make the necessary repairs. Also, evictions can be costly and time-consuming. It’s important that you do your research before you make your purchase, so that you know the details of the eviction process ahead of time. Some states are more landlord-friendly than others. I would also recommend taking the extra time needed to finding good tenants and doing background checks on them.
Capital Expenses
Major repairs for the property are also a disadvantage to owning rentals. Even with cashflow every month, this will generally not pay for high-cost items like a new roof. Other general maintenance items include carpeting or other flooring, interior and exterior painting, plumbing issues and replacing water heaters or other appliances.
Most financial gurus will recommend investing in single family rentals, because of the appreciation, tax write-offs and ability to leverage your money as I’ve already mentioned. However, it is extremely important to have patience, knowledge and extra capital, so that the risks can be easily managed.