The single-family rental unit is usually a small or older
home in a residential neighborhood. As a rental, it has several advantages.
First, the tenants are responsible for their utilities. The investor doesn't
have to figure the fluctuating costs of utilities into the rent payment. Another
advantage is the absence of tenant-tenant problems. Since other tenants aren't
having late parties upstairs or using too much hot water downstairs, the
landlord isn't called to mediate. Also, single-family homes tend to appreciate
faster than commercial or apartment property. It represents the American Dream,
and from this comes the demand for a lot and a house that you can call home.
Smaller, more modestly priced units are rising in resale value faster than
larger, more expensive units. Energy-conserving houses also have good resale
value. Finally, a single-family rental is easiest to sell. It appeals to buyers
who want it as a private residence or a rental. When investment money is scarce,
loans are usually available for owner-occupied dwellings. The single-family
rental usually attracts long-term renters.
However, it's more difficult¡ªusually impossible¡ªto rent a
house to carry itself. A vacant house in January will create an intolerable
flood of red ink. An apartment complex generates at least some income. With a
house, you're "putting all your eggs in one basket." Nevertheless,
houses can out-perform alternative real-estate investments dollar for dollar.
Even in markets
when house prices are flat or declining, investors can get
impressive returns by following these rules:
1. Buy at least 10 percent below the market price.
2. Never pay more than 10 percent on the money you borrow.
3. Keep the down payment under 10 percent of the purchase price.
Getting a seller of a house listed for $90,000 but worth
$80,000 to take a $70,000 price, a $5,000 down payment, and a 9 percent interest
note for the balance is hard, but not impossible. Here are some tips:
1. Concentrate on empty houses. They are a drain on
someone. But ask yourself why the house is empty. Local nuisances or
structural hazards may make the building unlivable.
2. Seek out little deals that make economic sense, rather
than tax shelters designed to lose dollars. Avoid buying a house with a
negative cash flow.
3. Look for lower- to middle-priced houses in neighborhoods
that make sense to future homeowners. Those houses almost always appreciate
faster than the overall market. They also attract long-term tenants who
sometimes buy the house. Consider writing a lease that gives the tenant the
option to buy. After you've wrung the property for its tax benefits, you can
unload it on the present tenant.