What I want to talk about today is investing in single-family homes and how making a lot of money in single-family homes is probably one of the biggest lies out there in the real estate investing community.
A lot of gurus are talking about going out and buying single-family homes and making money through investments in single-family homes … and over time you’ll become rich. The challenge with single-family homes is a lot of things.
Qualifying for single-family homes
First, you can’t qualify for a lot of single-family homes.
After you purchase 1, 2, 3, 4 homes you’re going to have trouble being able to purchase anymore because you’re going to end up not being approved by banks. Now, there are ways around that where you can go out and start getting private mortgages. Or you’re going to bring in partners to buy these single-family homes. But that’s going to take time and it’s going to take a lot more effort to get these mortgages.
Monthly Income
And the other big problem with single-family homes is trying to make a monthly income.
I see a lot of people who lost their job and went to these so-called gurus and these gurus were telling them what to do and what to invest in. They told them to go out and purchase properties and replace their income using single-family homes.
The challenge with that is if you buy a home and you put a mortgage on it, your expense for that house is going to be quite high. You’re going to have your mortgage; you’re going to have your taxes; you’re going to have your insurance and you’re going to have maintenance. And so, to be able to cash flow is not going to be that easy because to get a high enough rent is going to be quite difficult.
But still, these gurus or these people are coaching other people on how to make money in real estate investing. And they tell them to shoot for $100 or $200 or $300 a door per month. Well, if you’re doing that and you’re making an income of let’s say even $3,000 per month dollars, you would need 10 homes just to make that $3,000 a month if that’s what your income was prior to looking for real estate as a replacement for your income.
Re-renting Single-Family Home
The other big challenge with single-family homes is the costs associated with re-renting them.
So you have a tenant, and that tenant is paying rent on a regular basis. You don’t see any problem with them, but when it comes time to leave, they give their notice, and everything still seems fine. But when you go in there you realize you’ve got all this expense to clean up and to paint. Maybe they ruined some things; maybe they had a dog or a cat; maybe they ruined the carpet. So now your expense to re-rent this place is much higher than what you originally anticipated.
So now you’ve got all these extra costs, and if you’re only making a cash flow of $200 a month, and you end up spending $2,000 to prepare that home for another tenant, there goes your profit for the year.
So that’s the big problem with single-family homes is the re-renting expense.
Appreciation with Single-Family Homes
A lot of people are talking about how you really make money with single-family homes is through appreciation. I agree with that, but appreciation isn’t going to replace your income.
Appreciation and principal paydown are about making money with single-family homes or with any rental or with any real estate investment over time.
Now the way you do that is you buy a single-family home every year. Let’s say for the next 10 years, and you hold them for another 10 years. So, over a period of 10 to 20 years, your property has appreciated, which doesn’t always happen depending on the community you’re in. And as long as you’ve been breaking even, or covering your costs, and you’re able to allow your property to gain in value and the principal is paid down over that period of time.
So after the 10, 15, 20 years, or whatever the timeframe is, you sell off half your portfolio. So, let’s say you’ve had 20 properties. Then you sell off 10 of them and you use the money from that sale to pay down the other 10. So now you’re able to realize a not too bad profit or not too bad income from those properties, because now the mortgages on those properties are free and clear, or hopefully as close to free and clear as you can get them. Free and clear means there is no mortgage on the property or no loan against the property.
Now you’re going to be earning a much better income because of not having as many expenses. So, for example, you don’t, you may not have any mortgage expense anymore, and hopefully your maintenance will be less because you’ve been keeping up with your maintenance. And the other nice thing is your rents will hopefully be much higher.
Property Management
There’s another big challenge with owning single-family homes is property management. Property management can be a pain. I hate property management. I hate tenants. There are lots of issues with property management. You must be able to take calls at any time during the day for example. That’s what’s called toilets, tenants, and trash as the expression goes.
So, you’ve got to manage your tenants and you’ve got to replace your tenants when they move out. You’ve got to be at their beck and call when they need something done to fix up the property or to do whatever needs to be done.
Okay. To summarize, the biggest lie in real estate investing is getting rich through owning single-family homes, certainly as a replacement for your day-to-day income.
