About 10 years ago, I bought my first small single-family rental house. It is a one-bedroom, one-bathroom house and it's about 600 square feet. I paid $15,000 for the house. It rents for $475 a month (I could probably get more, but I’ve never raised the rent). The house had been sitting vacant for a while and needed some work when I bought it. I began to remodel it and before I had the renovations complete I had a lease signed on the property. That same tenant has lived there ever since. She is an older woman, who works part-time, but also qualifies for HUD’s Section 8 Program, which is a government housing assistance program that pays a large percentage of her rent.
I know none of this sounds terribly exciting, I agree. But buying small, one to two-bedroom houses is one of my secrets to building a successful real estate business. I now own many of these houses! Think about the game Monopoly 4 little green houses can be traded up to get 1 red hotel! Start small, think big and remember slow and steady wins the race!
First, let me define “Small House”. My definition of a small house is a one or two-bedroom house with one bath and less than 1,000 Sqft. Most communities have an abundance of small two-bedroom, one-bathroom houses that were built by the thousands right after World War II. These homes were built for the influx of G.I.’s returning home from the war. This inundation of returning military men drove the country into a huge housing shortage. It was these small houses that filled that immediate need. They were small, inexpensive to build, and could be built quickly. Because of the high demand, they could sell them as fast as they could build them.
It’s all about the numbers!
|1 Bedroom House||2 Bedroom House|
|Rent $475 x 12 months = $5700||Rent $675 x 12 = $8100|
|$5700 / $15,000 = 38% Annual Gross Return on Investment||$8100 / $15,000 = 54% Annual Gross Return on Investment|
7 Reasons Why These Houses are Such a Good Investment
- Small houses are more affordable. Many times they are so inexpensive you can buy them for cash, which I highly recommend doing just that!
- Paying cash helps you get better deals. If you can pay cash, it makes your offers more attractive to buyers because it allows for quicker closings and eliminates the need for financing contingencies.
- No Mortgage Payment -- This increases your cash flow and lowers expenses, which usually results in a higher R.O.I.
- Abundant -- Most communities have plenty of these small houses. Since most of these houses were built in the late 40s early 50s, they are found in older neighborhoods. While they have a basic functional design, they lack the amenities that most newer homes have, like laundry rooms and second baths. Aesthetically they are very plain, boxy, and have a cookie-cutter feel, which can be somewhat less desirable. But because they're older, small, and may need updates or repairs, many of them can be purchased at bargain prices.
- Inexpensive to Renovate -- the small size of these houses is a huge cost advantage when renovating. Even if they need a lot of work, there's just not a lot of square footage there, especially when replacing flooring, painting, roofs or siding. Having only one bathroom and a small kitchen also helps to keep the cost down.
- Construction -- these were solid built homes. Back then they used real hardwood for flooring and many times real two-by-fours (2”x4”, not 1.5”x3.5”) were used for wall studs.
- Make Your Portfolio Bulletproof -- The ability to buy and hold the houses for cash greatly strengthens and protects your real estate investment portfolio during a market downturn. Here in March of 2020, we are in the midst of a worldwide pandemic and social distancing being forced on all of us. In these times of economic uncertainty, would you rather be heavily leveraged in real estate or would you rather be in a position where all your properties are free and clear? In the next few months, I don't know what's going to happen, but there's a good possibility that some people are going to be laid off. Those same people are going to be late on their rent and they’re going to get behind. By paying all cash for these properties, I'm in a position where all I have to pay is taxes and insurance once a year. So, if I have to allow somebody some grace and some time to catch up on the rent, I have that ability. I have the peace of mind of knowing that I don't have to make a mortgage payment every month.