Are Single-Family Rentals a Good Investment Strategy?

For a long time, real estate has served as a dependable income and a wise investment strategy for many. However, the business of owning rental property is vast, and investors are often left wondering where the best place to put their money is. One of such investments that usually appears on the radar is single-family rentals, SFUs for short.

As the name implies, a single-family rental design accommodates one family within its designated location. So the tenants are the only residents within the structure and on the property.

If you’re debating adding SFUs to your rental portfolio, read till the end of this article to find out if they’re a sound investment strategy. We’ll take you through the pros and cons of owning single-family rentals and finally how to begin investing in them if you wish to go ahead. If you’d like a little more guidance, consider hiring a real estate investment manager to help you weigh your financial capacity and current market realities before helping you make a decision.

Now, let’s get started.

Pros of investing in single-family rentals

Appreciation rate

Compared to multi-unit rentals, single-family rentals have a faster appreciation rate. This trend is due to several reasons, including that the target market for single-family rentals is often higher income earners with significantly more cash flow. Another factor that drives the cost of these types of rental units is the smaller supply.

However, it’s crucial to note that while real estate is a relatively stable industry, the market is not fixed in a permanently upward trajectory. This misconception often confuses both sellers and buyers when the market starts to fall. Sometimes, the value of a home may reduce, and it is usually due to inflation or a depreciating neighborhood.

High demand

Single-family units are ideal for families looking for storage space, privacy, and parking. On the other hand, multi-units can accommodate more people per square meter, so more investors favor this kind of rental investment. But the trade-off for the tenants is often a lack of space and privacy. Due to this disparity between investors’ preferences and tenants’ wants, there is a gap in the supply of SFUs. That means investors in SFUs have a larger pool of potential tenants to choose from, often with a more stable financial standing.

Ease of financing

Securing a loan for a single-family unit is similar to getting one for a personal residence. Bankers are a lot more familiar with how to value them, set the interest rate, and more. This familiarity not only makes it easier to get approval it also makes the process faster.

Moreso, SFUs cost less than multi-units on average, and so require a smaller down payment. That makes financing single-family units more attainable for investors with a small budget.

Less tenant turnover

Moreso, people interested in single-family rentals are looking for a place they can call home–somewhere they can set up residence long-term. So if they go through the trouble of applying, they’ve most likely done in-depth research on the neighborhood’s amenities (school districts, bus stops, proximity to work, etc.) and are satisfied. If they pass your tenant screening, you can expect less tenant turnover because your new residents are likely to stay for a long time.

That’s great news for every landlord because it not only means more profit from fewer vacancies. It also means less cost on renovation and maintenance between tenants.

Cons of investing in single-family rentals

Higher maintenance cost

One of the reasons single-family units are in high demand is because they provide their residents with more privacy. But the trade-off for a detached building is the increase in the cost of maintenance. Landlords of multi-units can kill multiple birds with one stone when they fix the roof, an exterior wall, or the landscape. Unfortunately, SFUs are fully detached, so for each rental property, you have to bear the cost of repairs on each unit.

For example, it’s much easier to fix the plumbing of a multi-unit with three houses than the plumbing for three separate dwellings.

Higher risk

On average, single-family units are more expensive to rent than multi-units, so they provide a better ROI for the owner. SFUs are also less likely to experience vacancy because of their high demand, producing higher profits for more extended periods.

However, they still carry some level of risk. On rare occasions when these units are empty, the property generates no income, and you run at a loss, unlike multi-units that can still create some money even when they’re partially full. There’s also the risk of depending on a single tenant to pay rent from month to month. If anything happens, like the tenant moving out or a specific event renders them financially handicapped, your cash flow ceases. This scenario could also occur with multi-family rentals, but the chances of all your tenants being affected is much slimmer.

How to invest in single-family rentals

After weighing the pros and cons of owning a single-family rental, if you decide to go ahead and add it to your portfolio, you need a roadmap to help you. Are Single-Family Rentals a Good Investment Strategy

Conduct an investment property analysis

An investment property analysis is an in-depth review of market properties that provides valuable information to guide you before investing. You could use a real estate investment tool for this or depend on a local real estate expert. The purpose of property analysis is to give you information about occupancy rates, renovation costs, property financing, and more.

Secure financing

There are several ways you can secure financing to invest in a single-family rental. Traditional means such as bank loans are an excellent place to start. But if your credit score isn’t optimal, you may seek financing from private lenders.

Don’t worry if you have a small budget; there are still ways you can invest in real estate. Take advantage of loans that require little to 0% downpayment, and consider using your home as equity.

Buy strategically

A strategy many investors use is to buy property close to their location. This option offers two advantages. First, as a close resident, you benefit from knowledge about the property, the neighborhood, and possibly its previous owners. The second advantage is that by investing in a real estate close to you, you can manage the property yourself. However, that doesn’t mean you can’t still employ the services of a property management company to maximize your efficiency and profits.

Conclusion

There’s a lot to consider before investing in single-family rentals. While they give investors the benefit of tax advantages, less tenant turnover, and have a higher appreciation rate, they also have their unique disadvantages. They’re costlier to maintain, and the landlord has to depend on a sole person to pay rent. You should consider these factors and plan the right strategy for your future investment before adding SFUs to your rental portfolio.

Both investors getting started in real estate investment and those with a little more hands-on experience stand to benefit from employing the services of a property management company. You can significantly increase your profit margin while simultaneously reducing your time and effort by hiring a professional team to oversee your rental investment.

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