Residential Property
Single Family Homes - The Most Viable Options For the First Time Investor!
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Apr 12, 2012, 18:47

Single family homes are one of the most viable options for the first time investor. They tend to maintain their pricing better over other types of properties. When you plan to sell a single family home, your pool of potential buyers includes both investors and people looking to buy a home for their own family.

Both the buying and selling of a single family home is a safer and easier process than some of the other investment options, especially for those who already own a home. If the single family homes in your area are expensive, you could consider a more affordable option of purchasing a townhome. The disadvantage of owning townhome is that it comes with a monthly HOA (home owner association) payment that you need to consider when doing your cash flow calculation. Also, townhomes tend to appreciate less than a comparable single family home. Remember, the number one rule is to be cash flow positive when you get into the real estate investment business. Renters prefer a single family home to townhomes but if the townhomes are roomy and spacious, they are a good sell to the renters as well. Location is a consideration also. For example, a townhome in California may be a good choice while in Texas it may not be desirable. Land is plentiful in Texas and people typically prefer a single family home over a townhome.

What to look for when purchasing single family home?

Many factors need to be considered before you purchase a single family home or townhouse for investment purposes. There is a terminology used in real estate – location, location, location. While location is an extremely important aspect to consider, you also need to factor in the purchase cost and the projected cash flow before acquiring rental properties.

The first thing to consider, of course, is the price of the property. You must determine whether the rental income I the area will be enough for you as an investor to be cash flow positive. Don’t buy a property unless you are sure about being cash flow positive. The alt thing you want to do is pay the mortgage from your own pocket month after month.

Typically a three or four bedroom house is a good choice. If this is an older neighborhood, chances are the typical size is three bedroom. But if you can find a four bedrooms (approx 2000-2400 square foot home) it will appeal to a broader set of families. i.e. a family with two children.
Do not buy a very big home since you may limit your pool of potential renters. A larger home is more expensive and you need a higher rent to produce cash flow, and typically renters do not want t a very big home. The same logic applies to homes in the best school district. The higher price that you will pay to acquire such a property may be not be compensated by the slightly higher rent that you can command. You should run the cash flow numbers to determine this.

You also need to look at the neighborhood. Is it safe, is it a growing market in terms of job and economy and companies? Would renters prefer staying in this area versus other areas of the city? Are the schools of this neighborhood good enough? The answers to these questions will be of interest to a family considering renting the property. Are groceries stores and malls accessible from the rental property? normally that should not be an issue but sometimes, in newer construction areas, the lack of nearby shopping could be a problem.

Buying a home in a good school district is important, but buying one in the best school district where home prices are much higher may not provide enough higher rent to produce good cash flow. Look for a balance between cash flow potential and a good school district.

Another aspect to look at is whether in the neighborhood most people are home owners or renters. There could be several reasons why a certain neighborhood appeals more to home owners, instead of renters and you need to be aware of that. You don’t want to be struggling to find renters for your property.

If you are a hands-on person in terms of fixing and enhancing a home, you could also look at the option of finding a good deal on a not so well maintained single family home and then do the work on it on an economical scale. This way your cost basis is well under the mark and you are much more cash flow positive. This is a very lucrative option for a number of investors.

You can also attend some seminars on real estate in order to complement your own research. The information you will gain there is beneficial when you are looking at single family homes in areas you are not familiar with. You could ask area related questions during these seminars and get more insight into the trends and intricacies of that particular region. For example, in some states, having the master bedroom downstairs in a two story house was the norm. But in other states, having the master bedroom downstairs was out of the norm. When you are purchasing your rental property, you need to also look at these factors so you don’t purchase something that is the “odd one out”.

In order to remain cash flow positive, your purchase prices need to be as low as possible. We were living in a state where house prices were typically high and therefore investing in homes for rental in that state would not have been a sound decision. After doing some research and visiting a few states where real estate was typically more affordable, we narrowed our filed down to a few states where we could purchase good properties on a reasonable cost basis. Georgia and Texas seemed to be good choice for a typical first time investor to purchase single family homes. We focused on newer properties in master planned communities with good school district to attract a good profile of renters.