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Why Single-Family Investing Doesn’t Work

“The trouble with the rat race is that even if you win, you’re still a rat.”

—Lily Tomlin

Let me just come right out and say it… 

Single-family investing doesn’t work. 

Is that too harsh? I say no! And there are plenty of reasons why this is the case. 

Single-family rentals are what most people think of when they think of investing in real estate. But just because it’s common doesn’t mean that it’s a good fit for everyone. 

Something that I have discovered talking with over one thousand individual investors is the importance of financial freedom. People don’t want to have to work for their money. 

The problem with single-family homes is that there is a hidden cost to them that many people won’t tell you about. Your time!  

Don’t believe me? Well, let me break it down. 

Why is single-family investing not going to help you reach financial freedom?

The Goal of Investing – Financial Freedom

There is an interesting board game made by Robert Kiyosaki, the author of Rich Dad Poor Dad, called Cashflow

The goal of the game is to do enough so that you generate enough cash flow to become self-sufficient. You cover your expenses and you can get out of the rat race for good. 

But let’s apply that to real life. 

You likely work day to day in the rat race to make a living. 

Being financially free means that you have enough cash flow to cover your expenses. You no longer have to work for your money. 

Your money is chugging along like a well-oiled machine and making you self-sufficient

Doesn’t that sound amazing? Isn’t that exactly what most of us would want? 

Living comfortably and not having to go to work or chase the paycheck.

Financial freedom allows you to live the life that you really want to live

Maybe you want to travel, spend time with family or friends, build a business or write that book. 

Financial freedom allows you to do that. 

Single-family Rentals 

The reason most of us get into owning and renting out single-family homes is the dream of financial freedom. 

That’s why I got into it! 

Unfortunately, with how much income you generate from owning these homes, that isn’t possible

Let’s look at an example. 

Let’s say you can live comfortably with an income of $5000 a month. This is a bit of a lower estimate, but let’s call this the beginning of your investment future. 

To have financial freedom, your single-family homes would have to produce an income of $5000

You might be thinking that is easy. 

You have the mortgage that you are paying, and the general expenses that crop up over time. No biggy! 

The problem arises as people tend to underestimate the expenses of single-family homes. 

Typically, 50% of the rent goes to the expenses of the property. 

And if you aren’t wanting to manage the property yourself, and you hire a property manager, then that number is even higher

These costs typically cover landscaping, repairs, payments on the property, and a buffer for any vacancies or damage. 

Nothing you want to be skimping on, right?!

It is not uncommon to get a total profit of only $100 a month per single-family home. 

Let’s look back at that $5000 of expenses for a comfortable living. That would mean you would have to own and operate 50 homes

Let’s be generous and say that you are lucky. Your profits for each home are 5x higher than normal. You make $500 of profit per home. 

That is still 10 homes that you own, that you are responsible for, that you have to manage, or even do the handiwork if you didn’t get a manager. 

Now looking at this example, does having to manage 10 or even 50 homes sound like financial freedom? 

It’s not. 

It is its own full-time job!

When I started in single-family homes, I had 5 houses. But as time went on, I realized it was way too much work to be worth the investment. And I even had a property manager to help me out! 

Single-family investing takes a lot of time, and it isn’t an effective way to get to financial freedom. It doesn’t work!

Appreciation

When looking back at my time in single-family, I realized that I was relying on the idea of appreciation

The problem with that is home prices are higher than they have ever been. 

This is partly since interest rates are low, people aren’t getting evicted, and foreclosures aren’t happening right now. 

Because of this, there isn’t much room for single-family homes to grow in value unless it is over a very long time

If you are trying to have appreciation over a shorter time, this is a more difficult income stream to rely on as there are fewer opportunities for this with average prices already being so high. 

On top of this, the values of single-family homes go up and down with the market.

If there is another recession, values will go down and properties can default or go into foreclosure. That’s not a situation you want to find yourself in! 

And that is exactly what happened in the great recession. 

During the great recession, the default rate of single-family homes reached 4%. That is 1 in 25 homes without an income!

As I said, single-family homes don’t work. The asset class is not stable

But this doesn’t mean that investing in real estate is all bad. 

Multi-family on the other hand doesn’t have these same problems.  

Multi-family Investment – What Would You Do with More Time?

I always feel like a broken record talking about multi-family investing, but it really is a perfect investment

The income is truly passive. Once you make your investment, you don’t have to do any more work for the money to come in. 

The money works for you! 

Typically, the cash flow in these deals is at least 10% and often goes up to 15% or higher. Even on the low end, that is a great return!

And unlike single-family homes, these investments are scalable. Since you don’t have to spend any time managing the investment after it is made, you can invest in as many deals as you want. 

I know a guy who is invested in 70 multi-family deals!

Let’s look back at the $5000 a month benchmark we used earlier. 

It is so much easier to obtain that amount when you don’t have to do the work. When you aren’t the one fixing toilets, or getting tenants to fill your homes for 10, 20, or even 50 properties. 

Multi-family investing makes the dream of financial freedom a reality

Let’s also look at the risk associated with single-family homes. 

At the same time that single-family homes had their record high default rate of 4%, Multifamily units stayed at 0.4%. On top of that, the default rate stays more consistent and isn’t as susceptible to the market or even inflation

As you can see, multi-family is a low-risk, stable asset class

On top of all of this, there are even the tax advantages that you don’t get in single-family homes.  

However, I don’t want to be all negative. Single-family investing can be good for some people. Maybe those who are just starting out, or those who don’t plan to live off the income. 

But if you are wanting to obtain financial freedom, then multi-family investing is the right choice. 

And let’s be real, who doesn’t want to have more time for family, friends, or whatever you can dream of?

If this sounds like the right kind of investment for you and you are wanting to know more, then you have come to the right place! 

Check out our special report about investing. It compares the stock market to real estate, and it also includes how the pandemic affects your investment future. 

If you are interested in investing with us, we are happy to answer any questions that you may have. Join our investment club today and we will be in touch.

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