When it comes to alternative investments, single family rentals are tough to beat. Compared with stocks, bonds, and cash, rental properties have generated an impressive and consistent amount of wealth for stakeholders over time.
During the last 15 years and even through the recession, single family rentals continued to deliver excellent returns through appreciation and rental income. For several years rent prices have increased 3% monthly and in January 2019 they increased 3.2% — the fastest increase since 2017.
What’s creating this growth? Since 2009, home ownership has declined by 3.6 million and the number of renters increased by 1.9 million. This is due to rising home prices, higher lending rates, and a preference for flexibility.
Also, a new generation of home dwellers is more inclined to rent than buy. According to Pew Research, the millennial generation — which accounts for roughly half of U.S. households with children — are more likely to rent than own a home compared to previous generations.
Before we go into the gritty details of why SFRs are an ideal place to invest, let’s quickly define what a single family rental is and how it differs from other property types.
What’s a Single Family Rental Property?
Single family homes are a unique real estate asset. Often found in suburban neighborhoods, they are detached structures, usually with a yard and garage.
Other property types include:
Multi-Family Homes: Structures like duplexes, triplexes, and other multi-family homes have units for several families under one roof. They obviously provide more rental income streams than SFRs but also require more property and tenant management.
Apartment Complexes: Typically buildings with more than five living spaces, apartment complexes are considered by most lenders as “commercial” properties and typically have a different financing process. The potential for growth is clear, but this type of investment requires more owner-involved management.
Commercial Properties: These retail and industrial properties can be detached businesses, warehouses, or shops in a mall or complex. They differ from SFRs in that they tend to have longer term leases (e.g. 2-3 years) and the tenant is a business — not an individual or family.
Compared to other property types, SFRs offer a number of advantages. They are easier to purchase and manage, and the tenants usually have more of a sense of ownership, encouraging them to stay longer and take better care of the property.
SFRs also make better business sense. Here are some key reasons why single family rentals are a smart investment.
You Can Invest More Capital Than You Actually Have
Say you want to make a $250,000 investment but only have $50,000 cash to spend. This is entirely possible with SFRs through leveraging, a common investment practice where the buyer uses borrowed money to increase returns.
Through financing — whether a mortgage, VA loan, or private investor — your $50,000 down payment allows you to borrow the remaining $200,000 to purchase the home. Meanwhile, you’re collecting rent and the property is appreciating, boosting your $50,000 to five times the investing power.
As we’ve illustrated in a previous article, using “other people’s money” can be more lucrative than buying a home outright. For example, if you have $250,000 to invest, rather than buying one home for $250,000 you can buy five $250,000 homes.
How does this work? By using that capital sum to finance five $250,000 homes (putting $50,000 down for each of the five homes and borrowing the rest), you increase your investing share to $1,250,000 (5 x $250,000). Though you’ll have mortgage payments and expenses each month, you’ll still be netting rental income and earning five times the annual appreciation than if you’d just bought one home with your $250,000.
Basically, you’re using “other people’s money” to build your single family real estate portfolio.
Leveraging works with other real estate property types, but managing and unloading a single family rental tend to be easier.
SFRs are powerful income generators, yet they’re also one of the most secure investments you can find.
A Less Volatile Investment Than Stocks
Dollar for dollar, the stock market has performed better than the real estate market, but real estate has experienced fewer peaks and valleys.
During the 30-year period from 1977 to 2007, nearly 80% of total U.S. real estate return came from rental income return — indicating more stability than investments that depend upon value return.
In fact a March 2019 study shows that, although real estate returns come in slightly lower than stocks overall, their standard measures of risk are much lower. You can score big with a smart stock purchase, but you can also crash hard. Real estate has proven to be a little more predictable.
Here are a few reasons why single family rental properties are secure investments.
- Tangible Assets: As the saying goes, land will always go up in value because they’re not making any more of it. When you purchase SFRs you’re acquiring the land in addition to the structure built on it. No market is foolproof, but real estate gives you something tangible to inhabit, rent, or sell for profit.
- Less Volatility: Stocks can surge in the course of a few hours; they can also plummet in the same timeframe. Housing markets, though not completely immune to fluctuations, are less affected by national economic dynamics and have proven to be dependable.
- Steady Income: Single family rentals not only appreciate in value but provide a monthly income stream through rent. In February 2019, rents increased at their fastest rates in 10 months, showing that rents can rise even when housing markets cool.
- Inflation-Proof: Inflation is inevitable in the U.S. economy; however, real estate values are increasing at a faster rate than inflation. This allows property investors to stay one step ahead of inflation numbers.
It’s nice knowing that your money is in a relatively safe place, earning income, and appreciating in value. It’s also nice when the income requires very little effort on your behalf.
Great Source of Passive Income
Passive income is everyone’s ideal — money earned with little or no effort.
Though a single family rental requires some obvious maintenance, cleaning, and upkeep, rental agreements usually require renters to mow and reasonably maintain the home. With a dependable tenant who loves living in your property, you’ll be earning money while you sleep.
There are other sources of passive real estate investing — like, Real Estate Investment Trusts (REITs) and crowdfunding — but these options don’t always generate the same cash flow as outright ownership of a single family rental.
To help make rental home ownership even more passive, real estate investors with a portfolio of homes sometimes enlist the services of a property manager. This individual or company can take care of basics like repairs, rent collection, and tenant communication.
Property managers are an essential tool for the remote real estate owner — another key option for SFR investing.
Investing Without Borders
Thanks to technology, single family real estate investors are not limited to purchasing the homes only in their area. With a dedicated property manager in place, real estate investors earn reliable rental income without even seeing their properties in person.
Why would someone want to buy outside their local marketplace? Here are a few possible reasons:
- Accessibility: Markets like coastal California, New York City, and Washington, D.C. are out of reach for the casual or first-time property owner. If you reside in an expensive market, remote real estate investing expands your options to include more affordable communities.
- Return on Investment: Markets vary across the country. Through long-distance acquisitions, investors living in volatile areas have access to steadier markets with potentially higher ROI.
- Diversification: Remote real estate investing provides a little protection from local market ups and downs by allowing buyers to own multiple properties across a wide range of markets.
Long-distance landlords usually assemble local teams to help facilitate these out-of-state deals. For example, they could form relationships with local agents, inspectors, and property managers to purchase and maintain their single family rentals.
Another way to build a remote portfolio is through tools like Roofstock. Our service allows anyone to search through a database of turnkey rental properties for sale. Users can filter results by price, location, size, etc. and set up alerts for newly posted properties.
We also provide comprehensive due diligence data like tenant history, inspection reports, neighborhood ratings, and interactive tools for estimating costs and earnings. You’ll have all the numbers in front of you to make a smart purchase and you don’t need a Realtor.
The next step is as easy as Amazon.com: simply check out and close. You start earning rent as soon as you close on the home and we set you up with a local, preferred property manager to give you a little peace of mind.
It sounds easy and it really is. If you prefer more human contact in the process, our dedicated customer service team is available to help you find, research, and close on homes.
Curious about investing in out of state single family rentals? Check out this simple diagram on how our process works, then check out our Deep Dive into SFRs.