Why Invest In Single Family Rental Real Estate?
That’s exactly what I’m going to cover in this article.
Hey, Taylor Welch here, Co-founder of Wealth Cap™ Holdings. I hope you are well.
This is something that has been coming up more and more as we scale our holdings.
“Taylor, why are you in single family real estate?”
I mean, Grant Cardone is in multi-family and you know, there’s all these people preaching storage and blah, blah, blah…
What I want to bring them back to is: It’s all real estate.
Different Kinds of Real Estate
There are different slices of real estate that you can get into, and they all offer different pros and cons.
There’s nothing wrong with multi-family.
Multi-family real estate offers amazing pros, amazing benefits. It also has some cons and some downsides that you need to hedge against.
Single family rentals have some amazing benefits. It’s also got some downsides you have to protect against.
Storage is one of the fastest growing commercial real estate options that you can get into.
And it’s got some great upsides. It’s also got a little downside that you want to hedge against.
You’re never going to get away from this idea of risk.
And the way I think about risk is: If you’re trying to get to 0% risk, then you’re going to lose because you’re not growing,
But, if you don’t mitigate or protect against your risk, the chances of loss, then you’re going to get eaten alive.
I’m going to compare and contrast based on my experience, (which is extensive by the way.)
People sometimes know me from the marketing world, but I started in real estate.
My partners and I managed over 4,000 single family properties.
I worked at a great firm that became quite large.
Before I was a marketer, before I was a copywriter, before I got into the sales, before we built our info businesses, I was in the real estate game.
I was boots on the ground, purchasing real estate and managing real estate and signing tenants to leases and all of the things that go into making a real estate portfolio profitable.
I was in the game and I want to reiterate that to you.
A lot of times you’ve got these gurus coming up on the scenes who figured out how to flip one multi-family deal and they think that they’re an expert in real estate.
Chris and I bring a level of seniority and history that cannot be overlooked.
What you saw with COVID was a scattering of the metropolitan areas.
The people ran to the suburbs, because think about it: If there’s a pandemic, you don’t want to be stuck on a 12 level, 300 unit multi-family complex with a bunch of other people.
People perceive safety in the suburbs.
That served us quite well because our single family residential properties in the suburbs blew up.
People were vacating the cities. They were not renewing their multi-family leases and they were getting into houses.
Benefits of Single Family Real Estate Investing
Okay. So here are some of the benefits why to invest in single family rental real estate.
I’ll go through the benefits of multi family later in this article, too.
A benefit of when you invest in single family real estate is you’re going to have typically a slower curve of events.
Single family is usually not going to double in value in three months, and it’s not going to have its value cut in half in three months, either because the value of single family is based on the neighborhoods, the supply & demand chain, the comps, and all of the things that you’ve traditionally learned.
You probably own a house right now, and your house is slowly growing in value.
And if it loses value it is likely slowly losing value.
So it’s consistent and more controllable.
With single family real estate, the lead time is a lot longer for you to either get out, rebalance your portfolio, sell it off and get into a new neighborhood, et cetera, et cetera.
Okay. Now, every once in a while, every 60 or 70 years, you have a once in a lifetime issue.
2008 was a once in a lifetime issue where the real estate bubble got so big.
And by the way, my friends, let me just remind you that the value shrinkage in single family in 2008 had nothing to do with real estate.
It had everything to do with the loans. Don’t get confused.
There was not necessarily a crash in the value of real estate.
There was a bubble in the demand for real estate because of loans and the banks messed it all up.
Since 2008 was 13 years ago, we’re likely not going to see another one of those for a very long time.
Here’s another pro of single family:
Benefit: You Can De-Centralize Your Risk Profile.
You can control and literally slice and dice your diversification with single family real estate.
Your risk profile can be balanced across the zip codes, schools and hospitals in a city.
When we go into a city and we start beefing up a portfolio in a city, we don’t buy 300 units in the same neighborhood.
That’s what you call stupid. That’s dumb. That’s a centralization of your risk profile.
What we do is we go in and we say, look: “Here are the schools. Here are the hospitals.”
We like to follow schools and hospitals.
If there are 12 or 15 different zip codes in the city, we go through the suburbs and we split up our holdings along those lines so that we have 12 units in this school system, 15 in that school system, and so on.
We’ve got a cluster of 13 around this hospital, 11 around that hospital, because we’re going to get the benefits of renters who are in town for a year in a residency, or finishing out a mentorship, or they’re here to build a certain wing of a hospital.
So we’re able to actually spread out our risk along the entire zip code network of the city.
When you get into multi-family, you often don’t have a choice, unless you’re going to say, “I’m going to buy a hundred unit complex here. I’m also going to try to buy a hundred unit complex over there.”
Multi family is very centralized.
The benefit of single family is: I can control my risk profile down to about 11 or 12 hundred square feet.
If you can control your risk profile down to a thousand square feet, you can get safe and almost bulletproof.
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In 2020 we collected 90% of our rent.
We had less than 10% vacancy.
All of the things that we talk about, we actually executed in 2020.
- in 2019, we bought $400,000 in real estate.
- In 2020 we bought $20 million in real estate.
- This year we’ll buy $50 million in real estate.
All single family.
I’m not concerned about single family real estate getting crashed.
Am I concerned about de-centralizing our risk profile? Yes.
Factors To Look For when Choosing a City To Invest In
What I’m most concerned about when choosing a city to invest in is the:
- Job growth
- Population growth
If the deal is in some city where the job growth in 2020 was 0% and the population growth has stabled out, I’m not investing in that city.
I don’t care how good the deal is because the location is bad.
There’s not enough people moving into the city. The demand is not there.
If it’s in a city like Charlotte, North Carolina, where the job growth is 2.5% annualized over the last eight years, and it’s got one of the fastest growing populations in the country, then yes, I’ll do it.
(The appreciation of our single family homes in Charlotte last year was 9% – 9.5%)
My philosophy is, it’s more about the city and the location than it is about the type of real estate It is.
However, you can control even diversification citywide with single family a lot better than you can with multi-family.
Some Benefits of Multi Family Real Estate:
Now here’s some benefits of multi-family if you’re able to buy it.
Let’s say you buy a multi family deal for 10 million.
Within 6 or 7 months you may be able to force the appreciation of that.
With multi family you can double the value quickly because, while the value of single family is based on the neighborhood, the comps, the land underneath it, etc, the value of multi family is based on the net operating income.
How much you value a multi family building is similar to how you would value a business.
So a business makes more money. It’s valued higher visits has higher profits valued higher.
The Downside of Multi Family Real Estate:
What can go up very quickly can also go down very quickly.
This is the game. This is part of the pros and cons you’ve got to look through.
If you can double the value of a multi family complex in six months, you can also lose the value in six months.
If something crazy happens (COVID-19 happens) or let’s say you get a multi family in Memphis, Tennessee, and the number one job source there decides to lay off a bunch of people, then you’ve got a hundred unit multi family complex where 50% of the tenants no longer have a job.
They vacate, they go back home to wherever they came from. And that value of that property will get cut in half because you couldn’t keep the occupancy up.
There’s benefits and there’s risk to it. There’s an upside. There’s a downside. Here’s another downside to multi family real estate.
Another Downside to Multi Family:
In my opinion, another downside to investing in multi family real estate is you are much more limited in how you spread out the risk.
When you buy a 50 units clustered up next to each other, it’s a lot harder for you to de-centralize the risks.
If you’re just getting into real estate, I would say either get into single family first or partner with someone who’s really, really good at multi family and give them half of the deal.
You bring the money. You give them half the deal, something like that, because you do not want to incur a stupidity tax because you think you know what you’re doing and you don’t.
Storage is amazing. It’s one of the fastest growing types of real estate investments.
I live in Nashville, Tennessee.
There was a study that U-haul did a couple of months ago finding that Tennessee was the #1 destination for one-way U-haul booking trips.
That means a lot of people are moving to Nashville, Knoxville, Chattanooga, Tennessee.
When people move into a city, a lot of times they’re moving into a multi family unit first and they’re storing their stuff.
So, storage and multi units can benefit each other.
One of the great ways to improve occupancy of a multi family complex is if you can buy the multi family unit and you can have a storage unit sort of close to each other.
Then you can bundle in free storage for the first year.
That’s attractive to new renters.
There’s a lot of creative things you can do. Storage is one of those things.
The maintenance is almost zero and there’s very low overhead.
People think that they’re going to use storage for one year, but then 10 years goes by and they still have that old stuff in that storage facility and they just leave it.
We’ll be getting into storage very soon. (Probably in the next six to 10 months in a high demand city.)
Where we invest for single family is the opposite of where we invest for storage.
Where we invest for single family are the suburbs and the places where the cost of the asset is lower. But the rent rate is still high enough to make it worth it.
I did a training with someone on the San Francisco market.
The average price of a single family property in San Francisco in 2020 was $1.6 million. The average rent in San Francisco was $2,900.
That is a horrible deal. That is horrible economics. You never want to invest for rental income in San Francisco. Okay?
So we’re not going to. We don’t invest for single family in Nashville or San Francisco or Austin, Texas, or Seattle, Washington, Washington, DC, like Minneapolis.
These places are not great for your single family rental portfolio. Your yield curve is too low.
However, if you’re going to get into storage and commercial, you’ll want to invest in those cities: Seattle, Washington, Nashville, Austin, Washington DC, all of your fast growing cities where the demand for new property is really high.
That’s where you’re going to get the most bang for your buck on storage.
Minneapolis, parts of Florida, Miami. There are these fast growing cities where the cost of living is high and therefore people can easily justify $120 a month for a storage unit and get a smaller apartment or a smaller house.
Where I Would Start In Real Estate:
This is my opinion. If I could rate where I would go and what I would get into in proper order, it would be:
- Single Family
- Small Storage
- Small Multi Family
- Big Multi Family
Why Invest In Single Family Rental Real Estate?
The main chunk of our net worth over the long haul must be build on something that can’t be easily disrupted.
You do want to be diligent as an investor to compare the risk profile, the upsides and downsides of the types of real estate.
There’s such incredible upside with multi-family that people are really drawn to it because it’s sexy and it’s hot. But you gotta be aware of the downside.
There’s not as much upside on single family. That’s why people kind of don’t want to get into it because people want the sexy option.
So, people will go with sexy, but then they go broke.
Over The Long Haul
Warren Buffet was about the long haul.
It took forever, but it was slow controlled.
He’ll never lose money. That’s where we’re at right now.
We have several businesses and we want to protect that income.
So multi family is fine. The upside is good, but if you’re wanting to really thread the needle, I would say do single family and then go from there.
All right. I hope that answers your question of “Why Invest In Single Family Rental Real Estate?”