What Is a Single-Family Home, and Is It the Right Investment for You?

When you picture a house, what do you see? Let me guess: a standalone home with a lush, grassy front yard on a quiet street lined with similar houses, a white picket fence, and some shutters accenting the windows if you're feeling extra imaginative?

The house you're picturing is what we typically consider a single-family home. It became the stereotypical representation of a home for a reason — it offers more space and privacy than some of its alternatives.

When approached from an informed perspective, purchasing a single-family house can be a sound investment. Understanding what constitutes this type of home and its pros and cons compared to other common property types will allow you to determine whether this purchase is the right investment for your business.

Defining the single-family home

A single-family home, as the name suggests, is a residence designed for a single household. This type of dwelling stands independently, separate from any other structures, and is owned by one individual or family. Along with the building, its land is also part of the homeowner's property.

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However, the concept of a single-family home extends beyond this basic definition. It encompasses various aspects that distinguish it from other types of housing. These factors include architectural design, ownership responsibilities, zoning regulations, and more, all contributing to what we recognize as a single-family home.

Zoning label

Single-family homes are subject to zoning laws, determining where they can be built. On land intended for residential use, districts will label the land "R" for residential, followed by a number — R1 indicates a single-family home, whereas R2 signifies a multi-family home. If a plot of land dons an R1 label, developers must limit their construction to one home intended for one family.

Characteristics

Common traits of single-family homes include:

• One owner: The home should only need one owner because it is intended for a single family. Joint ownership may disqualify a home from R1 categorization.
• Independent utilities: Single-family detached homes typically have air conditioning, heating, water, and electricity of their own.
• Stand-alone property: The home must not share walls or a roof with another residence. Sometimes referred to as a single-family detached home, a single dwelling unit, or a free-standing residential building, all of these labels indicate the existence of a ground-to-roof wall.
• A private entrance: Unlike an apartment complex, a single-family home shouldn't share common areas, such as entrances and exits to the property. The resident should have direct access to their home.
• Singularly-owned land: To qualify as a single-family home, a property cannot share its land with anyone else — it must possess its own land and yard under the same ownership as the home.

Purchasing a single-family home as a rental property investment

As a property investor, deciding what kind of property you want to purchase is one of your first steps when embarking on a new investment endeavor. You have numerous options, from multi-family homes to tiny homes to individual units in a condo building.

When considering a single-family home, you should weigh its pros and cons to make the most informed decision.

Pros

• Privacy: Single-family homes offer solitude with no shared walls or external noises, allowing for a peaceful living situation without disturbances from neighbors.
• Exclusive spaces: Tenants can enjoy the luxury of having dedicated areas like basements, storage spaces, and yards without sharing them with others, ensuring more privacy and control over the property.
• Tenant stability: Tenants often stay longer, seeking stability while saving to buy their own homes or due to ties to the area, like family or children's education. This reduces turnover and associated costs.
• Reduced management effort: Longer-term tenants translate to less time spent on marketing the property and screening new tenants, resulting in more efficient management and potentially higher returns on investment in the long run.
• Lower property taxes: Single-family homes tend to have lower property tax rates than multifamily or commercial properties, contributing to cost savings.
• No HOA fees: These homes are typically free from Homeowner's Association (HOA) fees, providing more flexibility in budgeting and expenditure.
• Freedom to customize: Unlike properties subject to HOA restrictions, single-family homes offer the freedom to personalize interior and exterior without constraints, allowing for tailored spaces to suit your preferences.
• Cost efficiency: Managing a single-family property often incurs lower operational costs than larger multi-family units or commercial properties, reducing management expenses and boosting profitability.

Cons

• Limited amenities: Single-family homes miss out on shared amenities like pools, gyms, or clubhouses, which renters seeking such conveniences could consider a downside. However, this can also translate to a desirable level of independence, as tenants avoid shared spaces like laundry rooms.
• Higher down payments: Purchasing a single-family home often requires larger down payments, which can be a financial hurdle for some investors.
• Time management: Dealing with property issues falls squarely on the homeowner's shoulders in a single-family property, demanding time and attention. Utilizing property management services or online portals can ameliorate this workload but might involve additional costs.
• Risk of vacancy: A single vacancy means no rental income, making you, the property owner, reliant on one family's ability to make consistent payments. Rigorous tenant screening and alternative revenue streams can help mitigate this risk.
• Limited income stream: Single-family homes offer a single rental income stream, potentially limiting income compared to multifamily properties with multiple units and, therefore, more income potential.
• Loan limitations: FHA loans, advantageous for their lower down payment requirements, aren’t available for investment properties unless the owner lives in the home. This limitation can impact financing options for investors planning to rent the property.

Alternatives to single-family homes

Although single-family homes have much to offer investors, several other homes worth comparing exist in the real estate world:

Townhouse

A townhouse is a residential house part of a row of similar homes, sharing common walls with its neighbors, providing a middle ground between single-family homes and apartments in terms of privacy and space. A shared wall can impact noise levels, storage space, and privacy, but it may also offer a sense of community among townhouse owners.

Often, townhouses will have a small yard or patio; usually, a homeowners' association takes care of shared spaces like the exterior and common areas.

Multi-family home

A multi-family home is a residential structure with separate living spaces for multiple families or households. It could be a duplex with two units or a larger building with several apartments, each for different families. These homes allow multiple families to live in the same building, each with private space.

From a financial perspective, mortgage rates for multi-family homes can differ from single-family properties due to the number of units. Lenders might offer varied rates and terms for multifamily homes based on the property type and the number of units.

Moreover, loan rates for multi-family properties tend to be lower due to certain financing options like FHA loans, promoting lower down payments and potentially more favorable terms.

Condominium

A condominium, often called a condo, is a housing unit within a larger complex where each unit is individually owned. It's similar to an apartment, but instead of renting, people own their individual condos.

Owners typically share common areas and facilities, like a pool or gym, managed by an association that all condo owners are part of. Condo associations tend to take on the burden of maintenance and exterior upkeep, making owners' lives easier.

When considering these alternatives, investors should weigh the trade-offs in maintenance, management complexity, financing options, and the lifestyle they offer tenants. Each property type presents a different investment landscape, offering varying degrees of hands-on management, potential income, and overall return on investment.

What is a single-family home? Be an informed investor

In real estate investing, the allure of a single-family house shines brightly with its promise of privacy, stability, and customizable living spaces. These homes, however, come with trade-offs, such as limited income streams and higher demands on time and finances. Exploring alternatives like townhouses, multi-family homes, and condos widens the horizon, offering different blends of community living, potential income, and management complexity.

Townhouses, nestled between single-family homes and apartments, offer a balance of privacy and community, often managed by homeowners' associations. Multi-family properties diversify income but require adept management and might necessitate unique financing. Condos provide ownership within a communal setting, easing maintenance while adhering to association regulations.

As an investor, weighing these factors against your objectives and preferences allows you to make the best decision for your business. Each property type offers various levels of involvement, income potential, and return on investment. This careful evaluation empowers investors to make informed decisions aligning with their financial goals in the dynamic world of real estate.