The popularity of single-family rentals in the real estate market keeps increasing by the day. Across all single-family rental regions, their occupancy rate is nearly 95%, even during the most challenging times. For this reason, investors are spending billions because the growth rate increases year after year. As an investor, you can quickly maximize potential rewards and minimize risks by identifying suitable homes in the market. Read on to know why you should consider investing in these rentals when starting your real estate business journey.
Single-family versus multifamily
Over the years, there has been debate among real estate investors on whether single-family houses or multifamily properties make good rental investments. Not so long ago, investors purchased single-family homes and later moved up to multifamily properties. However, most people today are sticking with single-family rentals as an investment. The changes have happened due to several reasons, as mentioned below.
- There are many homes in the market for investors to choose from, and single-family units make up 67% of the current housing stock.
- The homes are cost-effective in comparison to multifamily properties.
- The units sell faster. After being listed for sale, houses go under a contract in less than a month in many markets.
- If you ever decide to sell the home, you will have different exit strategies like selling to a tenant, an owner-occupant, or another investor.
- Returns and cap rates in many markets are higher on single-family rentals compared to multifamily properties.
Top advantages of single-family investments
Lower Tenant Turnover
Tenant turnover costs money and time. The most considerable risk of owning any rental property is that when your tenant leaves, there will be a loss of rental income because the unit will be left vacant. As an investor, you will have to repair damages, market the property, and see different applicants. Single-family houses have a great advantage because tenants tend to stay year after year. The likelihood of having a vacancy is lower in comparison to types of rental properties such as apartments. There are different reasons why most tenants prefer to rent a separate family house, like:
- It’s easy to attract quality renters because the homes are usually located near better school districts and neighborhoods.
- The homes normally have private backyards and other accessibilities like a private washer and dryer, garage, parking, and a good front yard.
- These rentals have a lot of storage in the garage, attic, basement, and closet.
- There is privacy because there are no renters nearby, which means no disturbance.
- The homes, compared to apartments, are more spacious, which makes them the most preferred option for a wide option of renters, including those who work from home, baby boomers, families, and millennials.
- Most tenants who stay at separate family homes get attached to the property regardless of not owning it. The more they stay, the less the likelihood of leaving.
Growing demand
In the U.S., single-family rentals are a segment of the housing market that is fast-growing. Real estate experts predict that the growth will keep increasing in the coming years. Investing in single-family homes means that you will benefit from appreciation in property value. According to Freddie Mac House Price Index (FMHPI) report, the average house prices have increased by 10.82% annually in the U.S. Note that home prices rise faster in some real estate markets than others. Sun Belt cities such as Phoenix, Alabama, and Huntsville have experienced an annual home value increase of almost 15%. Large urban areas like Miami, New York, and Los Angeles have a lesser appreciation value yearly than the national average.
Inflation hedge
According to the Federal Reserve, the average inflation rate is about 2% per year in the U.S. It means that if you let your money sit in the bank, it will lose value year after year. Owning real estate is a good strategy against inflation. According to Freddie Mac Index, the annual prices of houses in the U.S. increases by almost 11%. These rentals are easy to diversify. The real estate market fluctuates regionally. Owning several different single-family rental homes in various parts makes it easy to cut loose one investment and reinvest it elsewhere when the need arises.
Cash flow
The greatest advantage of investing in single-family houses for beginners in the real estate market is cash flow. As an investor, you will generate passive monthly cash flow from the property. The net cash flow after deducting tenants’ rent collected, operating expenses, and mortgage will benefit you a lot. At first, the cash flow generated may not seem like much, but it will increase over time, and you could use it to invest in a different rental property after a few years. Single-family rental properties cost less and need less capital upfront. The number of units and the market you are buying into will determine the cost.
Easier financing
It is easier to finance single-family homes compared to multifamily properties. Lenders consider loans on homes to be less risky than commercial and multifamily real estate investments. There are a lot of financing options for these rental homes for beginning real estate investors. Lenders provide low-interest rates for loans and mortgage payments with a loan term of 15 to 30 years. Other options include home loans backed by V.A. loans and Federal Housing Administration (FHA) and alternative lending options like short-term private lenders who work with real estate investors.
Tax benefits
The IRS provides real estate investors with tax write-offs. The costs of owning and operating any rental property like taxes, insurance, property management fees, routine repairs, and maintenance are deductible. 1031 exchanges provide real estate investors with a chance to buy or sell a property and not pay capital gain tax. On the other hand, depreciation deductions aim at reducing taxable net income. It means that investing in family rentals comes with a lot of tax benefits.
Remote real estate investing
There are some high-cost urban areas where housing prices skyrocket, which is not good for investors looking for single-family homes. For example, in Los Angeles, the price of such a home is approximately $900,000. It means that as an investor, you have to put a down payment of $225,000 to purchase a single house.
Thankfully, many online platforms make remote real estate investing possible because you can check out family homes at lower prices to give you higher returns. It is not a must to live in the same city where you choose to buy a rental property. You can consider high growth markets such as Tennessee, Nashville, North Carolina, and Charlotte, where house prices are almost 66% lower than Los Angeles.
Remote real estate investors collect passive income each month, which helps them to purchase more rental properties. They only need to hire a reliable local property manager to take good care of the house and tenants.
There is no doubt that purchasing a rental house should be the first step for beginning real estate investors. The single-family rental market will keep growing as the demand keeps increasing each year so consider getting started right away to grow your real estate empire.
