A home is the American dream, right? A white picket fence, a yard for the kids to roll around in, and setting your roots down for 30 years—it sounds so appealing to many people as an investment.
But a single-family home is usually not a good investment—it’s a liability.
Here’s the true cost of buying a home:
Down payment + size of mortgage + all the interest payments + all the taxes + all maintenance + opportunity cost of time
The opportunity cost is the biggest cost of owning a single-family home.
It doesn’t cash flow if you live in it, but if you do rent it out for cash flow and that person leaves, you’re back to being 100% vacant!
You want to have multiple doors to rent, that way even if 5 or 6 people leave you’re still 85% full.
You don’t want just one McDonald’s—you want 50 of them.
Why does network marketing work? Because you’re not dependent upon one person, you got hundreds and thousands of people.
With single family homes, even if you rent them out, you just can’t scale. You can’t have the economies of scale unless you buy the whole neighborhood, but then you have the whole neighborhood calling you.
And what happens to single-family homes if interest rates go up?
The 10-year treasury rate is currently 2.69%
I’m borrowing money right now at 4.29%
That’s a 1.60 spread.
Let’s say interest rates go to 6%.
There will be 4 areas off the top of my head affected by this:
#4 Credit Cards
Will have a minor effect.18% will still be 18%.
#3 Federal Government
How much money do they owe? If their rate goes from 2.69% to 6%, this country is over. And if we’re over, China is over.
#2 Auto Industry
Autos will get crushed if interest rates go up. Interest rates are not paid by consumers, interest is paid by the manufacturers to subsidize the rate. Have you ever seen commercials like “0% interest for 72 months!”? That’s auto subsidizing. They might borrow money at 2.69%, but it’s not free!
#1 Homes
Single-family homes will be first to be hit when interest rates spike. Homes won’t sell anymore. Homes will literally stop.
So, the bottom line is I’d rather be 90% occupied in multifamily than 100% occupied in single family.
Many doors are better than one door.
And that’s why we do multi-family here at Rea Capital.
