Real estate investing is full of choices and options, and being aware of these is the first step to making the best possible investment decisions. For individual investors looking for a long-term, income-producing opportunity, rental properties offer considerable advantages.
Investing in rental properties has been gaining a lot of traction in the marketplace as the demand for rental homes continues to grow. A large portion of the millennial generation is delaying home ownership, due in many cases to student debt, but also fueled by that demographic’s desire for the mobility and convenience that comes with renting. In fact home ownership in the U.S. is the lowest it’s been since 1965, according to a recent Census Bureau report.
As the rate of homeownership in the U.S. continues to decline, rental housing is in high demand in many markets across the country. In Palm Beach, Broward, and Miami-Dade counties, 31 percent of single-family homes, townhomes, and condos are owned by people who live elsewhere. That rate is 40 percent in Las Vegas, and 33 percent in Orlando, according to a recent report in the Sun Sentinel Times. Much of this is driven by the fact that pricing for single-family housing is still below peak value.
If you’re looking into the possibility of investing in rental properties, you may find that investing in a single-family rental (SFR) presents a more appealing investment opportunity than multi-family properties. Here are some considerations that may convince you to take a closer look at SFRs.
Higher Cash Flow
The average annual return for SFRs is between 9 and 10%. In certain markets the returns are much higher. According to RealtyTrac’s numbers for 2015, Clayton County, Georgia, in the Atlanta metro area saw some of the highest returns in the country at around 25.8 percent. In markets where housing prices are already high and continue trending upward, returns are more modest. Miami, for example, yields around 9 percent, and the San Francisco market stands at 3.4 percent.
When investing in the right markets and neighborhoods, these properties have the potential to provide better returns than multi-family properties. The initial investment is lower and rents are often higher, resulting in a good net return each month. SFRs also traditionally experience less tenant turnover, which can represent considerable cost-savings when factoring in rehabbing and re-leasing costs.
Greater Flexibility Over Investment Property Portfolio Growth
The ability to acquire a portfolio of single-family rental homes gradually over time, compared with the up-front costs of multi-family apartment units for example, gives investors far more flexibility in how they choose to grow their real estate holdings.
Operating Costs Can Be Lower
Tenants of SFRs generally pay all utilities, which can represent a significant savings to the property owner. Expenses for repairs and improvements on a single-family rental are not nearly as significant as those for a multi-family property. Even if you own several SFR properties, it’s not likely that they will all need a new roof at the same time, for instance.
The day will eventually come for re-sale of the property, and a SFR can be marketed to more buyers than a multi-family building. They can appeal to both investors and owner-occupiers, so re-sale can be easier to accomplish.
While the market where the investment is located naturally influences all of these factors, there are a lot of potential advantages to investing in single-family rentals over multi-unit properties. Particularly for individuals looking to build their portfolio over time, SFRs offer the option of acquiring units gradually, while the strengthening housing market and high demand for rentals help to minimize risk.
Ready to start looking for your next single-family rental investment? Check out these tools to help find the property that's right for you: