Do you want to know how you can turn a huge profit by owning a single family home? Single family homes are not quite notorious for generating a huge cash flow. Even so, this article is going to teach you how you can do just that. All it takes it smart advertising and some creativity and you can turn a single family home into a huge profit machine. These techniques are nothing new, but they can be to a newbie.
What’s the best way to make money on a single family house? The absolute best use is to utilize it as a primary residence. The absolute best two ways to turn it into a profit monster is to build it from nothing, then sell it. Or, find a fantastic deal on a pre-existing house; then renovate it, and re-sell it
Issues with turning single family homes into rental properties
Are there any issues with renting out a single home? There absolutely are. Some of the issues are that if the tenant of a single family house doesn’t pay rent, you’re going to have an exorbitant money loss on your hands. The cost of an unoccupied single family home is incredibly high. You’ve still got to pay the taxes on the property, the maintenance, you likely still have a mortgage, and you’ve also got the insurance. And, you probably have a mortgage on where you’re currently living too. If you don’t, you’re still paying rent, if renting is what you do. Add in the cost of evicting a tenant, and you’re good to go! Even if you’ve been making good money off of renting it for any number of years, just a few months of not receiving payment can negate the money that you’ve made off of it over the years.
*CAP Rates: By themselves, single family homes lave a low Capitalization (CAP) rate. Now, what is a CAP Rate? A CAP rate is an abbreviated real estate term that compares two things: the cost of your property to the amount of cash it generates. To get this number, you divide the Net Operating Income (NOI) by the cost of your property.
As rental properties, single family homes often have low Capitalization (CAP) Rates. This is a commercial real estate term that compares the price of the property to the amount of money it earns. To calculate the cap rate, you divide the Net Operating Income (NOI) by the price of the property. Before purchasing a single family home with the intent to rent it out, you should know now that single family have low CAP rates, and this is not going to benefit you in any kind of way.
Don’t change the structure of the home, ever!
There are a couple of issues with making a single family home into a rental. The reason being is that the most profitable, and best use of this type of home is not using it as an investment. Some investors will try to turn the house into a duplex, a senior living home, or something of that nature. No matter what they’re trying to turn it into, the plan is always the same: to change the entire floor plan. This is a terrible idea. Any time this idea shoots into your head, shoot it back down with “No, that is not an option.” Single family homes have great advantages that will be shot if you do this. What are they?
The first is liquidity. Single family homes are actually one of the safest, most easiest pieces of real estate to sell. By keeping the house in its liquid form, you’re maintaining that safety. If you’re got a decent investment portfolio and times get tough, this is your easiest property to sell.
The next is appreciation. Homes actually appreciate at a faster rate than any other real estate asset. Reason being that their demand and value rises. There is almost always a buyer looking to buy their dream home; there are fewer buyers looking to buy their “dream condo” or “dream townhouse.”
It is crucial that you follow this advice and not change the homes floor plan—ever. Always let it remain a single family home so that you can sell it as such if you need to. You’re going to have a very difficult road ahead of you when it comes to selling if and when you decide to if you change the layout. You can turn the home into a rental money making machine without ever having to touch the layout of any single family home in your investing portfolio.
What are some of those creative ways we are talking about?
A. Student Housing: If the home is near a university, you can rent it out to college students. You’ll actually never have a vacant house if you do this. It also works if the university close by is a smaller one. It doesn’t need to be a giant university. You’ll be really surprised how many universities are near your property if you look. One of the best parts about renting to students is that most of their parents pay the rent, and co-sign. Much younger people tend to not really care about their credit scores, but their parents certainly do. It’s very rare to receive a late payment (or no payment at all) from a college student for this reason. Every now and then you may get rent late, but it’s usually because the student forgot to give their parents check to you. This happens often enough, and the parent will become agitated and start mailing it directly to you anyway.
With a co-signer, you’ll also have someone to sue (that you have a chance recovering money from) in court if it ever comes to that. Most college students have roommates. Because of this, if you would normally charge a certain amount in rent, you can actually charge higher by advertising a certain amount “per room.” This makes the cost of rent appear lower, when in reality, you’ll be making more money.
You also can charge more if you furnish it. Most college students don’t have or even want to buy furniture. You don’t need to go to Restoration Hardware to get it either. You can easily go to a thrift shop, or find great deals at a cheap furniture department store. Just like you don’t want to furnish the place with expensive stuff, they’d really rather you didn’t have expensive stuff in there anyway. Things will get knicked, they’ll have parties. This way neither of you have to worry about if a table accidentally gets knocked over.
If the property is in proximity to a college, you can rent to college students and not only remove the concern of vacancy issues, but also potentially increase the rent above market rate. This doesn’t just work with big universities, either, it works for any small college too.
B. Vacation Rental: When the single family home is in a vacation destination, you can really make some big money. Typically, vacation rentals are rented per night, or per week. Throughout any given month, you can bring in some serious cash. For example, if you charged $1,000 per night, and that same person stays for 7 nights (say you offer a deal if they stay a full week rather than 5 days), you’ll make $5,000. That’s almost five times the amount of rent you’d make in a month on a regular residential property. Of course, you’ve still got your expenses such as utility bills and furniture, if you don’t already have it. Either way, even if you have to furnish it, you’ll make that money back in the first month. A wonderful benefit of vacation rentals is that you’ll never have to worry about evicting anyone. The people visiting are on vacation; not only do they have to go home, but they’ll want to.
C. Rent to Own: A fair amount of homes are not located near a university or a vacation zone. In this case, renting to own is a fantastic option. It’s a controversial topic, as renting to own doesn’t have the best reputation. However, the reputation wasn’t really created by the landlords, its by the renters. Usually, a rent-to-owner will decide that they don’t want to own it anymore, forfeiting their down payment. They’ve squawked and complained about it over the years to where the process itself has gotten a bad rep. What happens in a rent to own situation is that the renter moves in and signs a couple documents. The first one that they sign is the actual lease agreement. The second document they sign is an auction to buy the house at the price you both set. In order to complete this, they must put down a non-refundable payment of at least five-thousand dollars, sometimes more.
You also can push maintenance onto the tenants, since they are becoming the owner of the property. They’ll be much more willing, because they’re becoming the owner of the house so they want it to stay nice, and running properly.
Bear the law in mind:
There are laws in the Landlord and Tenant Act that can make this difficult. They’ll typically argue that you wrote that you’d cover maintenance in the lease and that you still have to fix it. While that can happen, they probably aren’t going to do much about it. You really save a lot of money with rent to own situations because you don’t have to deal with maintenance, as the tenant handles it themselves. You’ll also almost never have to deal with phone calls from your property management company about usual tenant issues such as parties, or noises. When you have someone in your house that is currently becoming the owner, they’re going to take very good care of it since they’ve already got a down payment in it, and it’s ultimately going to be theirs.
Lower Rent: You’re also going to make more in rent (more than likely). This is because rent to owns typically have higher rent amounts. People expect to pay at or below the rental rate when it comes to renting to own; but something you can do is offer “rent credits.” What is a rent credit? Keep in mind that not every state offers these. A rent credit is:
Rent credit: Rent credits are going to allow you to bring the rental rate up. For example, if the regular rate is $1,400 a month, you can offer them a rent credit of $400. This means that the rent is raised up to $1,800. If you’re thinking this doesn’t sound like a really good deal because you’re giving them a large credit, that would make sense. However, almost all rent to own landlords don’t realize that how this works, or that they can even do it. Just about all rent to own tenants never end up actually buying the house; it’s just how it works. Reason being that people are renting to own because they don’t have the cash or credit. Generally, that isn’t going to change in a few years. They decide to rent to own because they think they’re going to be in a better place when the time comes to buy it.
That almost never happens. A lot of the time, they’ll end up in a worse situation financially because things come up in life. Everyone has an emergency at some point or other, and if you’re already struggling, it can really kick you when you’re already down. That’s why this is such another easy way to make a big profit by renting a single family home. These rent to owners end up with the same credit score, and are unable to buy the house.
When you offer a rent credit, you’re really winning, not losing. For that exact reason. They almost never buy the house anyway. So you’re actually making money by offering the credit. So not only have you avoided having to pay for maintenance, but you’ve also earned more cash flow. At worst, the tenants will actually buy the house. However, if you’ve priced it right, you still make out well. No matter how you look at it, it’s a win.