Making Sense of Single Family Home REITs

houses-691586_1280.jpgIf you lease a single family home, you won’t expect a real estate investment trust (REIT) to own it. This is because most real estate companies would rather invest in apartments communities that give them multiple properties for investment in one location. Renting out a single family home defies the aspect of scalability of the investment. Although it seems to be counterintuitive for a real estate investment trust (REIT) to own single family homes, they have been increasingly successful.

Single family homes can be costly for REITs because each house needs to be taken care of. This includes prospecting and acquiring individual homes, its renovation and repairs, marketing, maintenance and managing other matters, whereas in multiple housing properties some of these can be done at a collective level, thus reducing time, effort and expenditure. However, it can be argued that single family homes have the advantage of saving on costs of common area and amenities.

chart01Renting out of single family homes by local real estate businesses seems to make much more sense. It is much easier for them because local businesses know the positives of the location on a micro level and availability of infrastructure and other facilities like proximity to schools and shopping places, among others.

However, due to a large number of foreclosures following the Great Recession, some residential REITs have made good deals by acquiring a great number of such properties in Florida, Georgia, Illinois and Texas. These REITs acquire single family homes from various sources, but foreclosure is a common method among them.

chart02A positive for REITs is that foreclosure can be a lengthy process and can easily test anybody’s patience and money. A sizable company with an experienced management team would have stamina to better endure the procedures. Also, if a company operates in several states, it has to know the applicable rules for each state.

Since this is a relatively new business model for REITs, it hasn’t been thoroughly tested and there are multiple uncertainties on how these investments should be dealt with.

chart03.pngIf such companies can increase footprint density by aggregating multiple properties in nearby places or neighborhoods and building an efficient management system, then they are more likely to thrive. Both recent transactions – the purchase of American Residential Properties by American Homes 4 Rent and the merger of Colony American Homes and Starwood Waypoint (forming Colony Starwood Homes), which have overlapping areas, should benefit from some of the cost synergies.

Source: American Homes 4 Rent (NYSE:AMH), Colony Starwood Homes (NYSE:SFR)

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.

Differences Between Single Family and Multifamily Home Investments

san-francisco-210230_1280Investing in residential real estate is always a good way to diversify your investment portfolio. The proper real estate investment option for you certainly depends on the time you can dedicate to managing and maintaining the properties along with your long-term financial goals. A good place to start is with either single family or multifamily properties. They have their own pros and cons, and are appealing to investors based on personal finances and investing preferences.

Single Family Investment Properties

There are many advantages to investing in single family properties over multifamily properties. The first being that many single family homes can be purchased below the fair market value. This is an important investment strategy because profits are made and lost at the time the property is purchased. When an investor purchases a property at a percentage below market value, they gain that percentage in equity from day one.

For example, a single family property is worth $100,000. An investor purchases it for $90,000 or ninety percent of the current market value. The investor gains a $10,000 or ten percent equity stake in the property as soon as it is purchased.

That being said, many multifamily properties are sold above their present market value due to the fact that they are less available in many areas. It all comes down to the law of supply and demand. In addition, the prospect that future improvements will result in higher rents tends to keep multifamily sales prices above current market value.

Property management expenses vary depending on the logistics of managing the properties, along with tenant population. It is certainly true that higher end single family properties with qualified tenants have less turnover on average than their multifamily counterparts. Renters of these homes tend to view their living conditions as more permanent, and have a far greater sense of pride in maintaining the property themselves. This results in less maintenance costs and repairs for the investor. Tenants of single-family properties typically do not outgrow the space nearly as quickly because there is usually a backyard, additional bedrooms, and, in most cases, a basement.

Multifamily Investment Properties

There are many benefits to investing in multifamily homes over single family properties. Multifamily presents a more reliable source of income. A vacant single family property generates absolutely zero income, while a multifamily commercial real estate property will rarely sit one hundred percent unoccupied. The units tend to be less expensive than a single family and therefore fill up faster. Many first-time real estate investors purchase multifamily properties so they can save money by living in one of the units. Living on the property also helps reduce the time and costs associated with management and maintenance.

Another huge benefit of multifamily properties is the fact that investors can own multiple units with less mortgage loans. For example, if an investor purchases ten single family homes, they are required to obtain ten separate mortgages. They are required to make ten separate monthly payments, along with ten quarterly property tax payments, and ten property insurance payments. Applying for ten loans can be frustrating, and, once obtained, all of the payments and paperwork is very time-consuming. On the other hand, if an investor purchases a ten-unit apartment building instead, they have the benefit of the same ten rental incomes with only one mortgage, one property tax, and one property insurance to deal with.

As you can see there certainly are differences between single family and multifamily residential property investments. If purchasing residential real estate is a good fit to your personality and investment strategy, then a combination of single-family, and multi-family units will help build a balanced portfolio.

Written by GilverBook Team