Why Invest in Single-Family Homes?
The world of real estate investment offers many opportunities in different markets and asset classes. Whether you want to buy and hold rental properties or take part in commercial real estate, the best practices for each asset type are different.
In particular, 2024 is panning out to be a year that favors single-family rental homes more than ever. Why? Because the American housing inventory for resale homes is still trending low. Combined with high mortgage interest rates and a steeper cost of borrowing, the real estate market continues to favor renter demand — especially when it comes to single-family dwellings.
What is a Single-Family Rental Property?
A single-family rental property is any residential rental that is a detached home. Basically, it’s a single-family home used as a rental unit. It is not connected to any other buildings occupied by other tenants. Since it’s not a commercial property, it can’t be a place of business.
SFR is an investment property type that is suitable for landlords of small portfolios to institutional investors. These homes are typically leased for long-term leases but can be marketed as short-term leases for vacationers or traveling employees.
Is a Single-Family Home a Better Investment Than a Multi-Family Home?
Comparing single-family rentals (SFR) to multifamily property is like comparing apples to oranges. Every real estate asset has its pros and cons. Here are some of the considerations your realtor may share with you regarding both investment classes.
Multifamily Properties
Multifamily units certainly have value, especially when you want to market to young professionals, seniors, and small families in densely populated areas. You will find that multifamily homes are also in high demand in a housing market where rentals are hot. Since condos and duplexes tend to be cheaper than single-family rental properties, they can be a good investment for someone who wants high-demand spaces in the rental market.
Single-Family Rentals
Single-family homes belong to another asset class that is valuable to real estate investors. These detached residential properties provide substantial cash flow through higher rents and long-term leases. Single-family housing usually has yards, which is good for people who enjoy outdoor living, have pets, or have kids. They also have more interior space, which is ideal for residents looking for a long-term stay.
Since many homeowners are not selling their properties, residents interested in homebuying may turn to SFR for a season instead of an apartment. After holding for a season and earning enough rental income, you may also decide to sell the home for a lump cash out.
Advantages of Owning Single-Family Rentals
Owning this type of property can offer plenty of advantages. It’s an excellent addition to any portfolio diversification plan.
- Single-family rentals in good condition and with quality tenants can offer a good return on investment, especially when you don’t take out a loan to buy one.
- You don’t have to spend any time managing an SFR when you hire a property manager.
- This asset class is ideal for a first-time investor since you’re dealing with just one property and not multiple units.
- Single-family rentals are simpler to maintain since they are not connected to other rental units. I.e. a roof leak or pest problem only affects one house, not the entire apartment complex.
Disadvantages of Owning Single-Family Rentals
No investment type comes without drawbacks, so we don’t want to paint a fairytale picture of SFR investment. Here are some of the drawbacks to consider before you choose this investment opportunity.
- SFR properties per unit have a higher property value and purchase price which translates to a higher upfront cost of ownership per unit.
- SFR rent values can decline if its market has high volatility and trends downward.
- Turning a larger property between tenants can be more time-consuming compared to a smaller apartment.
- Vacancy rates hit you harder since you typically have fewer units that bring in income.
- Finding a property management company that you trust can be challenging.
Should You Invest in Single-Family Homes?
Integrating single-family rentals into your investment strategy can provide a viable way to earn passive income and grow your portfolio. It’s also one of the easier investment types for people new to real estate management. To find out more about the benefits of investing in SFR, contact us today.
