Single-family rentals are the most popular type of real estate investment, with a low barrier to entry and strong historical returns. According to CoreLogic, U.S. single-family rent recently returned to pre-pandemic levels with 3.4% year-over-year gains as of May. With recent significant market appreciation trends in recent years, single-family rental owners benefited from substantial increases in property values in addition to strong rental prices and high demand. Below, you'll learn strategies for investing in single-family rentals, including key factors for success.
Understanding Single-Family Rentals (SFRs)
Investing in single-family rentals involves acquiring residential properties, such as houses or townhouses, and renting them out to tenants. Unlike multi-family properties, SFRs offer a unique opportunity to cater to individual families and provide them with a comfortable and private living space. This niche in the real estate market has gained popularity because of its lower barrier to entry and potential for long-term returns.
Is it a Good Idea to Invest in Single-Family Rentals?
Single-family rentals attract investors for the potential tax write-offs, expense deductions and the nearly passive income from long-term rentals. Purchasing single-family rentals in popular vacation destinations or near your primary residence can offer a familiar and simple path into real estate investing.
Purchasing single-family rentals in markets with greater opportunities can prove a profitable strategy. Should you purchase a single-family property and assume it will be successful? No. However, with research and commitment to both searching for desirable properties and later managing them, you could build an additional income stream and asset value.
Like all investments, single-family rentals require research and understanding of rental markets and hyper-local trends in target markets to identify opportunities. If you can build the knowledge to assess a property's potential and market trends, you can find undervalued properties for potentially larger gains.
Benefits of Investing in Single-Family Rentals
Here are some of the benefits of investing in single-family rentals.
1. Steady Rental Income
Owning a single-family rental property can provide a reliable monthly income, making it an ideal choice for investors seeking stable cash flow. For the ideal property, aim to create positive cash flow from the first month. That means that even if you take out a mortgage to purchase the property, the rental income is greater than the total mortgage, taxes and expenses.
2. Appreciation Potential
Over time, single-family homes tend to appreciate in value, offering the possibility of capital gains when you decide to sell the property. Real estate has long been a favored vehicle to transfer generational wealth, as the value of properties tends to outpace inflation. Whether you sell the property or pass it on to heirs, it should retain its value or benefit from long-term appreciation.
3. Easier Management
Managing a single-family rental is often less complex than dealing with multi-unit properties. With fewer tenants to handle, you can focus more on personalized tenant care. Likewise, a long-term rental offers less hassle than short-term rentals. With long-term rentals, tenants are motivated to protect the property and take care of minor repairs themselves, especially if you price the rental slightly under market value.
4. Diversification
Including single-family rentals in your investment portfolio can add diversification, reducing risks associated with having all your investments in one asset class. Real estate is typically influenced by factors independent of the stock market. Likewise, residential properties aren't affected by the same trends as commercial properties, adding an additional layer of diversification.
5. Tax Benefits
Rental property owners enjoy tax deductions on expenses like mortgage interest, property taxes and maintenance costs, which can significantly lower the overall tax burden. While the primary purpose of an income-producing property isn't a reduction in taxes, you can reduce your taxable income from rental income by deducting qualified business expenses.
Finding the Right Single-Family Rental Property
If you're ready to start, here's what you need to consider and research before investing in single-family rentals.
1. Location
You might have heard the cliches, but they are true. Location is everything in real estate. You can't overcome a poor location with fantastic amenities. Research the neighborhood thoroughly. Look for areas with low crime rates; good schools; amenities like shopping centers, parks and office space; and access to transportation. Consider up-and-coming neighborhoods for greater value in appreciation long-term.
Ideally, you should first identify neighborhoods or areas with the greatest potential. These become your target neighborhoods. Set alerts for online property listings in these areas, and if you live nearby, drive through the neighborhoods looking for for sale by owner signs.
2. Property Condition
Once you find a property in the target neighborhood, inspect the property to ensure it is in good condition. Repairs and maintenance can eat into your profits if neglected. Get a professional inspector in to check major systems, including the electrical system, HVAC, roof, foundation, walls, fireplaces, windows and doors. If you have to make property repairs, be sure to account for those in the total property cost.
3. Market Demand
Analyze the rental demand in the area. A property in a high-demand area will likely lead to shorter vacancies and higher rents. Check rental rates and vacancy rates for comparable properties in the area to determine what you can realistically expect. Speak with real estate agents for their opinions and experience with rentals in the area.
4. Future Growth Potential
Look for locations with potential for future development or infrastructure improvements that can positively impact property values. For example, an area with a new business complex or major mall planned for development can appreciate significantly. Likewise, new public transportation plans to improve the area's connectivity can lead to long-term growth. Check the municipality's website, and speak with other investors and real estate agents to understand an area's short-term and long-term growth potential.
Final Tips for Investing in Single-Family Rentals
Single-family rentals can offer a practical path to start investing in real estate with less than $100,000. If you identify target neighborhoods with strong rental and appreciation potential, you could purchase multiple single-family properties and create several revenue streams.
Success in single-family rentals comes down to understanding market values and rental demand and purchasing a property at or under market value. With dedicated research and networking, you can build the skills to purchase and rent a single-family home while creating positive cash flow from the first month. Learn more about how to buy your first rental property and how to manage rental properties. Consider diversifying with investments, such as real estate crowdfunding or real estate investment trusts (REITs).
Frequently Asked Questions
What are the benefits of investing in single-family rentals?
The benefits of investing in single-family rentals include positive cash flow, property appreciation and stable returns over time. It’s also often easier to secure financing for single-family homes.
Are there downsides to investing in single-family rentals?
The downsides of investing in single-family rentals include potential vacancies, limited scalability, market volatility and possible higher acquisition costs.
How can I finance the purchase of a single-family rental?
You can purchase a single-family rental with cash, a mortgage or alternative investment financing like a personal loan.
About Alison Plaut
Alison Kimberly is a freelance content writer with a Sustainable MBA, uniquely qualified to help individuals and businesses achieve the triple bottom line of environmental, social, and financial profitability. She has been writing for various non-profit organizations for 15+ years. When not writing, you will find her promoting education and meditation in the developing world, or hiking and enjoying nature.