Single-family rentals (SFRs) have been attractive to me from the outset of my real estate investing journey.
The benefits of having your own space with no shared walls is something that resonates with a lot of people. While I searched for multifamily properties and learned about the benefits of investing in apartments, it was SFR investing that I ultimately chose to pursue.
I think that this segment is one of the best places to invest and easiest for most to understand. Here are ten reasons that investors (including myself) have fallen in love with SFR real estate.
1. Appreciation Potential
Historically, traditional homes have had some of the strongest appreciation. This has led many investors to focus on SFR as their primary investing strategy.
Markets such as Atlanta, Dallas, and Denver have seen great appreciation over the last decade since the Great Recession. In fact, all three have seen values increase by double or more from their market bottoms.
For those already investing, appreciation can be a huge driver in your total return. There is nothing like having a rental property you purchase increase $100,000 or more in value when you go to sell or trade up.
2. Consistent Cash Flow
While appreciation is one goal of investing, one of my favorite parts of rental property investing is cash flow. Provided you buy at the right price, there can great monthly cash flow over and above your rental expenses (i.e. positive cash flow). You can use this to pay down mortgages, invest in another property, or even live off the cash flow if you have enough units.
Growing and scaling your portfolio as you collect rent checks from your mailbox each month is an amazing feeling. While cash flow is certainly something you can find with other types of properties, there is another way SFRs work in your favor -- higher rents.
3. Higher Rents Compared to Multi-Family
Compared to apartments and small multi-unit properties (triplex, quad, etc.), SFRs generally command higher rents. This is may be due to a variety of factors, size, location and tangible differences of this property class.
Think about it: would you pay more for a garage, a backyard, 500 sq. ft. more space, and no noisy upstairs neighbor who walks like an elephant?
I would as well.
However, if you want your own space that has no shared walls with the neighbors, you are going to have to pay up. These higher rents offer more income potential for you which can translate into greater cash flow. From there it is your decision to pay down, buy more, or live on the extra income.
4. The Power of Leverage
Most SFR investors I know are doing so using leverage. That means they use a mortgage or other loan product to buy the property. It is common to see traditional 15 or 30-year mortgages on single family properties.
Some people I know are accidental landlords - they couldn’t sell post Great Recession, so they put their property up for rent. However, the vast majority people who own rental properties are actively building their portfolios and scaling using the magic of leverage (and doing so responsibly, I might add).
One thing I’ve found in my investing journey is that banks understand investing in SFR property. This makes the process of getting a loan for an investment property pretty standard. If I can close on a rental property halfway around the world, you can start building your portfolio with a notary coming to your house to close.
When used responsibly, leverage can really amplify your returns because you can make more money from cash flow and appreciation.
Here is an easy example to show how leverage can work if you have $100k to invest:
The All Cash Option
Let’s say that one SFR costs $100k all in, rents at $1,000 / month and appreciates 5% per year. Your net income per month is $500 since you paid in cash.
At the end of one year you have:
- Rental Net Income of 12 x $500 = $6,000
- Appreciation of $100,000 x 5% = $5,000
- Total profit of $11,000
The Leveraged Option (Using a 30-year mortgage)
Now you are putting 20% down and buying four identical SFRs that cost $100k all in. They also rent for $1,000 per month, and appreciate at 5% per year. Your net income per month is $100 per SFR because you need to pay your mortgage.
At the end of one year you have:
- Rental Net Income of (12 x $100) x 4 properties = $4,800
- Appreciation of ($100,000 x 5%) x 4 properties = $20,000
- Total profit of $24,800
This simplified example shows why people will use other people’s money via mortgages to amplify their returns. The total return is more than doubled and is only over a one-year timeframe. Even though you don’t own the home outright, you still get the appreciation on the home if you decide to sell.
5. Diversification Across Markets
By investing in SFRs, you can go as vertical or horizontal as you want with relative ease. You could purchase within markets, across markets, and at different price points within a market if you so choose. (Check out Roofstock's markets)
At first, I was nervous to only purchase in one market for my SFR portfolio. So that led me to purchase in a total of three markets.
The reason? Home prices and rents ebb and flow over time.
While I feel confident in the markets I invest in, sometimes things happen and I would rather have some level of diversification with different employers and opportunities in a variety of markets.
Another option would be to purchase in one market at different price points. Simply put, a home renting for $1,000/month is going to attract a different tenant pool than one that rents at $2,000/month and vice versa. If there are shocks to the local market they don’t necessarily affect these different tenant groups in the same way.
6. Lower Entry Price
Depending on where you invest in the country, SFR prices can start as low as $30k and go all the way up to $1,000,000+.
Not everyone wants to invest with leverage, and that's understandable. For many people, owning a home free and clear allows them to sleep better at night. That is key and unique to each person so these lower price points can offer an easier way to get started.
If you do use leverage, being able to put 20% or 25% down on a $100k price point home is easier than coming up with 25% on a $1,000,000 apartment complex. This lower entry price allows you to put up a smaller percent of your net worth and simply get started sooner. Plus, you can always trade up to larger units in the future.
You can generally find a lot of rental properties on Roofstock in the $70k-$300k range, but this fluctuates throughout the year.
7. Serious Tax Benefits
While not specifically unique to SFRs, investing in rental property offers significant tax advantages such as:
- Deducting operating expenses and property management fees
- Deducting insurances and property taxes
- Deducting mortgage interest. Real estate investing has different laws than private ownership and mortgage interest deductions
- 1031 exchanges. The basics of a 1031 exchange is that you can trade a ‘like kind’ property for another. If you have one SFR, you can sell it and invest in another without having to recapture depreciation or pay capital gains taxes. It rolls into the next property and can allow you to scale much easier. Check out this article for more details.
This article will show you some other really great advantages to investing in real estate. Many people successfully and legally end up with cash in their bank account while on their tax forms they show a loss or break even each year.
Again, talk to your tax advisor about your own situation and laws for your state.
8. Easy Improvements To Boost Returns
Another great advantage of investing in SFRs is that you can customize each property, from exterior paint and garages to countertops and appliances. You are able to develop systems to use these same paints, tiles, carpets, appliances and more. If you have a qualified contractor and property manager, this can make maintaining your homes easier than ever.
Let’s say the average home in the area rents for $1,000, but by putting in new stainless steel appliances the going rent is then $1,100. Your $2,000 investment for the new appliances would only take a little under two years to recoup.
A lot of successful investors make small tweaks and customizations like this to increase their SFR’s desirability and subsequent rental rates.
9. Less Potential Overhead Compared with Other Real Estate Investments
With an SFR, you have one home and one tenant (or family). With multi-family and apartments, you have multiple units and multiple tenants. While investing in apartment complexes and multi units can offer diversification by having many different tenants, this also comes with its own headaches and added overhead that an SFR won’t necessarily have.
The more units, the more applications to go through. There will be a greater number of turnovers to handle (which is one of the most expensive events of owning rentals), and more maintenance issues with multi-units. You have more HVAC units and water heaters in multi-units than you do in an SFR.
10. Tenant Longevity
An underestimated benefits of owning an SFR is that tenants generally stay longer compared to multi units. Gary Beasley, the CEO of Roofstock, notes that SFR tenants usually stay an average of 3 years!
The less your property turns over the fewer costs you will incur with rental property ownership. It is an expensive endeavor to turn over your property and it significantly impacts your bottom line.
Owning Single Family Rental properties can offer some great returns for investors who want exposure to real estate.
The only question is where you want to start and how large of a portfolio you would like to build.