Rental Property Café™ Episode 5: Is The Single Family Home A Good Strategy In This Market?Real Estate Coaching
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What you'll get from this video podcast:
In Episode 5 of Rental Property Café™, we discuss whether investing in single family homes is a practical real estate investment in this current market.
|☕ Single Family Homes Have Consistent Demand [00:02:42]|
|☕ Many People Are Not Mortgage Ready [00:04:28]|
|☕ Competition with First Time Homebuyers [00:06:02]|
|☕ Buying a Real Estate Investment Portfolio [00:08:04]|
|☕ Single Family Home Supply Is Greater Than Small Multi-Family Supply [00:10:51]|
|☕ Pricing Issues When Buying A Single Family Home As An Investor [00:12:04]|
|☕ If the Numbers Work [00:14:23]|
“Never forget to run the numbers. Run them on each individual property if you're buying a portfolio. Make sure that it all makes sense from a business perspective.” -Cynthia Meyer
About the Rental Property Café™
The Rental Property Café™ podcast offers a real estate tool kit for busy professionals who are building a real estate portfolio. In each episode, co-hosts Cynthia Meyer & Veronica Woods explore ways to grow a successful real estate business while growing your career.
About Cynthia Meyer
Cynthia Meyer is a financial mentor, CERTIFIED FINANCIAL PLANNER™, CFA® Charterholder, real estate investor, blogger, and the founder of Real Life Planning. She offers unbiased financial planning and learning resources to real estate investors. Cynthia is a first-generation rental property owner, who built a rental property portfolio with her husband, Steve, while they were both building their careers. She lives in NJ, where she balances teenagers, her financial planning practice, and a rental property business.
About Veronica Woods
Veronica Woods of Daniel Woods Real Estate, real estate advisor and investor, is passionate about helping her clients create wealth, legacy and lifestyle through real estate. She works with people to buy, sell, rent, and develop residential and small commercial real estate in Delaware County and Philadelphia, PA. An MBA in finance from the Wharton School, Veronica also shares her real estate wisdom with new investors on her YouTube channel.
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Transcript - Rental Property Café™ Episode 5: Is The Single Family Home A Good Strategy In This Market?
[00:00:06] Veronica Woods: Is it really a good time still to buy single family properties? Stay tuned for our answer in this week's Rental Property Cafe. Hi, I am Veronica Woods from Daniel Woods Real Estate.
[00:00:19] Cynthia Meyer: And I'm Cynthia Meyer with Real Life Planning.
Today we're going to talk about a question that both of us have been getting a lot from our clients, which is it still a good time to buy a single family home? A lot of folks have made a successful investment portfolio in real estate, starting in the last recession, buying single family homes and renting them out largely to families.
That's what we did in our rental property business, and we moved on over time to multi small, multi-family properties. What do you think Veronica? Is it a good time to buy a single family home?
[00:00:54] Veronica Woods: I as a professional real estate advisor, I get questions on both ends of the spectrum between multifamily and single family.
So from some of the hardcore single family property investors, there is some fear about leaping into multifamily because it's unknown. And then there's some people who maybe are starting their journey and they have in their heads that single families are too slow. They want to start in multifamily and they think single family is the wrong way to go.
So my perspective is it all works. I'm also an investor myself. I own both multifamily and single family and I manage properties for owners who own both. By far, the people who are making the most money in terms of cashflow have a combination. Where I come from is that it all works, but you have to evaluate the individual investment.
However, I would say this is still really a good time to invest in single family homes. I know we're going to get into that more on our benefits of still investing in single family homes on this show.
[00:02:05] Cynthia Meyer: A lot of my clients are still in the building stage of real estate investing. They're actively trying to acquire new properties over time. They saved their net cash flows from their current portfolio, and then they use it as a down payment. They also borrow against their current properties or refinanced to try and build their portfolio. To build their number of doors. I have seen that there's a lot of skepticism on the single family home front. People with cash are looking for deals, perhaps in their current market, but I'm encouraging folks to think outside the box a little bit. So I guess that brings us to our first point, Veronica, if you want to kick that off.
#1 Single Family Homes Have Consistent Demand
[00:02:42] Veronica Woods: I get the skepticism too. I would say they're discouraged. They're discouraged because as we're recording this podcast, the real estate market is really hot across all different asset classes, just in general. But one thing has been true is that demand continues to be strong. As an investor, you have to think about where is the opportunity? Your opportunity is to create a product on the market that you have a willing group of people to buy. So it's no different from houses, or sneakers. There is a demand. Are you willing to help solve the problem in markets to meet this demand? There was an Urban Land Institute study that I found. They do this big study of professional investors every year and they rank people's outlook on different asset classes, from commercial to residential. And the number one bullish asset category was single family rentals.
And that was no surprise. I think a lot of the mom and pop or smaller investors, should probably follow the lead of what the larger investors are thinking. So that's one factoid that kind of across the market. People are bullish on single family rental.
[00:04:02] Cynthia Meyer: The Joint Center for Housing Studies at Harvard University recently put out a statistic that 400,000 net new renter households will be added annually every year over the coming decade. So there is an increase of the number of people looking for rental housing. When you have kids, you tend to want to live in a single family home in a good school district. So those are always going to be attractive as a market.
#2 Many People Are Not Mortgage Ready
[00:04:28] Veronica Woods: Beyond that. There's still going to be a portion of people who are just not mortgage ready. So that's like a term lenders use in terms of people who are making the right income, their credit score. You need to have a certain level of financial health to be ready to buy a property.
What I've seen from working with say, first-time home buyers, people on the bubble right now who could only qualify for a FHA mortgage, they're really going through hoops right now to qualify for a mortgage. Some people are just falling out. That means there's going to be some people who just have to rent. It's not even like a life preference. In certain markets of working class people, they're going to have to rent. They're looking for capable landlords who aren't going to be slumlords. I would say some of the local towns in my area, I manage properties in the Philadelphia area and the suburbs as well as the city. I know that there is a shortage of capable landlords who are going to follow the rules of health & safety and provide adequate housing for families. That's something that's important to consider.
[00:05:38] Cynthia Meyer: As a parent, I can say families need space, right? The single family homes that we have, or the duplexes that are large on both sides, have been consistently rented since we bought them. The activity during the summertime when people want to move, so they can make sure maybe they keep their kids in the same school district, or if they're moving them to a new school district, they get that done in the summer break.
There's always going to be high demand.
Competition with First Time Home Buyers
[00:06:02] Veronica Woods: The other thing, sorry, just have a few more points on the demands to talk about in terms of another thing that people mentioned is they feel like they're competing with first time home buyers. I would say, I wouldn't think about it that way.
I would think shift the paradigm in thinking that the average first time home buyer who's cash strapped.
Just think of this person. They're cash strapped. They have to buy a property that's really close to move in ready. A property that's close to move in ready, the numbers probably aren't going to work. They wouldn't have worked two years ago in terms of what you're putting into it, and the rental rate. So that means you're really going after the property that needs a little TLC.
For first time home buyer. They don't want to put in the work. They don't have the cash to put in the work. A lot of times they're discouraged from their lenders of getting a more complicated type of loan. So you are really competing on not the full segment of starter homes, but the ones that kind of need a little work.
Now, I would say the ones that just need paint and flooring, there is more competition for those. Cause everybody wants like a layup. But I do think there's still opportunity in the houses that maybe you can't get a regular mortgage in order to purchase.
[00:07:22] Cynthia Meyer: That's a really interesting point and about a third of millennial investors are looking to invest directly in properties, according to a recent Bank Rate survey. These folks have been watching HDTV and the DIY network and know they have visions in their head of maybe buying a distressed property and putting a little love into it, making it beautiful, but hadn't really thought through everything that it takes financially to make something like that happen in terms of liquidity.
There are different ways that you can buy single family homes. You don't necessarily have to buy one at a time, although for a starter investment, that's probably what people are going to do.
Buying A Portfolio Of Homes
[00:08:04] Cynthia Meyer: You can buy portfolios of single family homes. For example, there are many retiring baby boomers who are tired of landlording. They are looking to divest themselves of an entire portfolio in a particular market. Investors with capital: There is a big opportunity here.
What are you seeing in that space?
[00:08:24] Veronica Woods: I see that a lot. Those people are calling me and asking me, "How do I unload my portfolio?"
Some of them, depending on what their financial position is, they might be more patient to try to price the individual assets, the value, the best they could.
Some of them, for simplicity, just alright there's 10 houses. I want X. So I'm going to take X divided by 10. Then they put a sign with that price across the board and they'll say, "Hey, you can pick one, you can pick 10." So there's really some opportunities out there for people who can assemble the cash to almost mimic what you would do in the multifamily.
If you're buying four houses, four doors, technically you might, if there's not a lot of fourplexes. They're all three bedrooms. You know what I mean? So technically, maybe you could pull together a package of portfolios that is just as profitable, if not more than a single a fourplex.
[00:09:27] Cynthia Meyer: Many of the listeners, I'm sure have looked at roofstock.com. Where you can search by portfolio in a particular area, and you can see turnkey type investments where the offering is for the sale of the property with optional property management as well.
Make sure your own financial capacity, that you run the numbers. We're going to talk a little bit more about this again, in this podcast. That mode isn't necessarily for the new real estate investor.
But it can be a big opportunity, right? To do that either through a portal or through investment property realtors and property managers like yourself who may have clients that they can match.
[00:10:07] Veronica Woods: Yeah. I would say even, along the lines of evaluating the opportunity as a package and as individual assets. Sometimes people throw garbage in. There might be 10 properties. There are three dogs in there and then they're trying to shuffle them in with the other ones. So you have to be careful and not get excited just because, "Oh, I get to buy a pack of properties." You still have to evaluate each individual one. Just cause there's a tenant in it, that does not automatically mean it's a good tenant. Especially in 2021 with different things going on with eviction moratoriums. Should we extend it? Should we not?
[00:10:47] Cynthia Meyer: Is there a bigger supply of single family homes or multi-family properties?
#3 There is a Larger Supply of Single Family Homes
[00:10:51] Veronica Woods: Yeah. So the third thing, just to think about in terms of why single family is a good option as an investment, it's just the sheer volume of the supply. If you're thinking about evaluating real estate in an area, before you look at pricing, look at the housing stock.
That's what we call it. How many roofs are there in an area? What's the mix? More urban areas will allow more densely populated buildings or multi-families. The more suburban you go; the zonings are actually against having more multifamily buildings. If you want to invest in area A and there's no multi-families, then if you want to invest in multi families, you need to pick another neighborhood.
Evaluating the housing stock is the first thing. Just for numbers, like in Philadelphia county, from January to June, year-to-date, there were 10,000 sales of single family homes on the MLS and 800 multi-family homes. So just by the sheer volume of just opportunities to look at, if you're not looking at single families, you're probably going to have to be looking at a lot fewer deals just because of the volume.
Buying A Single Family Home As A Rental
[00:12:04] Veronica Woods: The story really for the last year or so has been of that housing stock, the number of people who want to put their properties on the market, what we call the inventory, has been low, historically low. Each market has different reasons. Two big macro reasons are one: the baby boomers are just slower in downsizing. They aren't putting their homes on the market. Some of it is fear from buying something else. Some are the cost of senior housing options. On the other end, on creating new housing, the builders from the 2008 crisis never have resumed the level of new construction.
This isn't like a new phenomenon, but it's catching up to us because of the storm of the baby boomers, being a little slower in selling their houses. And that's why we have this supply story that's really pressuring prices right now. It's just, there's less stuff to buy of anything, really but I would say that I still see there's opportunity in niches.
I'm talking about the first time home buyers or the sellers that you need to look out for. So probate and people who inherited houses. They're always going to be a little bit more motivated to sell as well as people under financial distress. That's where the opportunity lies. As long as you have the financial wherewithal to handle the deferred maintenance or the rehab that you may see like magic on HDTV.
[00:13:38] Cynthia Meyer: I've been seeing a lot with clients in different places or different regions in the country, there are still opportunities. But to bid for the home in move in ready condition, as you mentioned earlier, what they're getting outbid on, even with cash offers, because there are folks who are looking to buy a home to go and live in as their primary residence. They're willing to bid well over asking price. Whereas an investor is not going to be willing to bid well over asking price because they want the numbers to meet. But there still seems to be opportunity in different pockets of the country of finding a home that can be renovated up to rental standards and put on the rental market.
For many folks, there's still time to do that before school starts in the fall.
#4: If the Numbers Work
[00:14:23] Cynthia Meyer: The fourth point we want to make here, and we always make this point is that, Stick to the fundamentals, right? It always depends on your goals as a real estate investor, your risk tolerance and your financial capacity.
Never forget to run the numbers. As Veronica mentioned earlier, run them on each individual property, if you're buying a portfolio. Make sure that it all makes sense from a business perspective regardless of how real estate is treated. Taxes as passive income, there's still costs to carry a real estate investment.
And it's important to have a business mindset when you're thinking about making any investment or purchasing or selling a property. I can't emphasize that too much as a financial planner really, it's so important to run the numbers and make sure that there's going to be some positive cashflow.
[00:15:13] Veronica Woods: And not be so anxious. Like you said, if the top of the show, I definitely have talked to clients who are anxious and they're feeling frustrated it, should I wait? And I would say, don't just do a deal that just be doing a deal as the numbers don't work. I tell people like, Hey, I would love to do a transaction right now, but I don't want you to be so discouraged to real estate investing that you do the wrong deal.
At the same time, let's be clear. People are still buying investment properties that cashflow every month, every week, every day. So people are still doing deals. It's a little harder to find them, but that doesn't mean that they don't exist. That just means to work with professionals that help you refine your criteria and get the insights scoop that you may not normally get.
I know you were talking about off market deal, that you're under contract. lot of times those come with having relationship. If you don't have that, that's something you should be doing in the interim of, pulling the trigger on a deal, talking to people who are in the know about various markets.
[00:16:23] Cynthia Meyer: If in the current market where you're investing, if there really isn't a lot of inventory that interests you, but you have capital available that you're looking to deploy, think about whether or not a different type of real estate investment is appropriate for your goals and risk tolerance and financial capacity and where you are right now.
Now that doesn't mean doing a total 180 and going from single family homes to large commercial shopping centers. That's too big of a jump, but it might be say moving from the single family home to the small multifamily or moving from the small multifamily to a small apartment building.
There's lots of options there. They're worth exploring to see what is going to be the best next step for your real estate portfolio personally. And again, got to run the numbers. Have to make sure that it makes sense.
[00:17:14] Veronica Woods: Sometimes that might just be going over one zip code. There are lots of submarkets within a Metro area and sometimes it's moving a town or two over, you can have a similar entry point.
Maybe it's a different type of tenant. There are some people who only think they can go the type A properties. The ones with the luxury or higher in amenities, that's where the most pricing pressure is. So if you're evaluating where the market is right now, that's not where most of the opportunity is.
You might even want to think about another Metro area. Maybe there's another market in the south or the Midwest or another part in Northeast that you might not have considered. Now I wouldn't do that without talking to people on the grounds that your trust and build up a team there. Maybe it's time to consider a long distance investment.
[00:18:06] Cynthia Meyer: That's right. And that has a different class, obviously, you can't manage the property yourself. If you're investing in another state, you need to find a great property manager who has a good team of folks on the ground. Thinking through all those options, I know it's very attractive to many clients who live in highly appreciated markets, right?
Parts of California, for example, where they're looking to capture some of that appreciation, possibly do a 10-31 exchange or a tax deferred exchange into something else, maybe in a different state. It's important to think through all of that process and there's a relatively tight timeline.
So making sure what you want to do before you go ahead and sell the property that your thinking of capturing appreciation. Anything else you want to add Veronica before we finish up for this morning?
[00:18:53] Veronica Woods: Last thing I'll add is, be cautious about looking at the prices alone as an indicator of, " Is this a good investment?" So when we're talking about run the numbers, you mean all the numbers. One very important point right now is that the mortgage rates are at a record low. They seem to be holding relative grounds although people are thinking maybe they'll took up in the next year, but as of right now, the overall cost of debt service on investment means that your dollar today can go a little bit longer.
You can technically afford to pay a little bit more today than you did three years ago because the mortgage rates have changed. So that's something just to keep in mind that really evaluate the overall cost of doing the deal. If the numbers work at the given interest rate that you are borrowing money on, it's a good deal.
[00:19:46] Cynthia Meyer: That's an excellent final point. It's always a pleasure to talk to you here at the Rental Property Cafe. And for those of you who are new to this video podcast, please go to the end and see our previous episodes that we've posted. If you have a topic that you'd like us to handle, please email email@example.com and don't forget to hit subscribe so that you can be notified of new episodes. Have a great day.
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