When it comes to investing in real estate, you have many options. You can invest in apartment buildings, self-storage facilities, hotels, single-family homes, and more.
Here at Invest.net, we’re big proponents of single-family rentals (SFR). However, as with any investment, there are pros and cons to investing in this asset type.
In this article, we’ll dive into what those pros and cons are so you can make more informed investing decisions. But first, what is single-family real estate exactly?
Single-family real estate refers to properties that have only one living unit. In other words, they are designed to accommodate only one family or household.
As a result, single-family homes usually only have one kitchen and a single set of utilities. They’re also free-standing, meaning they don’t share any walls with other properties.
In contrast, multi-family real estate refers to properties that have two or more living units, such as duplexes, triplexes, fourplexes, and larger apartment buildings.
To give you an idea of how big the SFR market is, consider that the majority of housing units in the U.S. are single-family homes—about 82 million out of the total 129 million occupied units in 2021.
The single-family housing market is valued at over $30 trillion, which is more than double that of the traditional commercial real estate market ($13.4 trillion).
Needless to say, SFR is a huge market. The real question is whether or not it makes a good investment in 2023 and beyond (especially compared to multi-family real estate).
Let’s start with the benefits of investing in single-family real estate:
Compared to other property types, single-family homes can be relatively inexpensive. This is partly because they are easier to finance. Mortgages for single-family homes generally require a lower down payment (usually between 10% and 20%) and offer relatively lower interest rates.
Demand for single-family homes tends to stay strong as many American families want to have their own place to live in. As a result, SFRs tend to appreciate in value faster than other property types do.
On top of appreciating in value, single-family homes can generate steady rental income. So long as the incoming rent exceeds your property expenses, you’ll maintain a positive monthly cash flow. And with the help of a property manager, this can become a truly passive investment.
Tenants of single-family homes tend to rent longer than tenants of lower-priced apartments. This can mean fewer vacancies and less volatility overall.
Single-family homes tend to be taxed at a lower rate than commercial real estate. This means you don’t have to give up as much of your rental income to the government.
Since you only have to worry about one unit per property (as opposed to many per property) and tenant turnover is relatively low, single-family homes can be easier to manage, especially if you get a responsible set of tenants.
Even if your real estate goes out of style, the long-term growth prospects of hard assets, including real estate, are strong. This is particularly true during high inflation.
As mentioned earlier, single-family homes tend to stay in relatively high demand. This means they are good at maintaining their resale value. Compared to stocks, for example, single-family homes are less volatile and more stable investments on average.
Now that you understand the advantages of investing in single-family real estate, let’s go over some of the disadvantages:
Because single-family real estate investing can be so lucrative, competition can be fierce. If you don’t act fast, another investor might beat you to a deal. However, it can be easier to get in on good SFR deals if you invest in a single-family rental fund managed by expert investors.
When a property only has one unit, a single vacancy will wipe out all your rental income. In other words, there’s less diversification across tenants than there is with multi-family properties. As a result, vacancies can be very costly, especially over extended periods of time. However, you can offset this risk by investing in multiple SFRs.
On average, SFRs tend to generate less rental income than multi-family properties. But then again, SFRs tend to cost less as well, so the overall return on investment (ROI) could be just as good, if not better.
Depending on where the single-family home is located, it may be subject to homeowners association (HOA) fees. This can add to your property expenses and cut into your profit margins.
Single-family real estate is a long-term investment. Though it can generate good rental income, most of the returns come through property appreciation. You can try to flip a distressed SFR by buying it below market value, renovating it, and then selling quickly for a profit. However, this comes with added risk since the housing market could take a sudden dive. The best single-family property investments take time.
So should you invest in single-family real estate? It really depends on your personal situation and risk profile. As with any investment, investing in SFR properties will require taking on some risk. Honestly assess your financial situation, goals, and priorities. Then do what’s right for you and your family.
If you’re interested in buying single-family real estate but don’t know where to start, consider investing with Invest.net through our SFR fund I. It’s a fixed-income portfolio of single-family rental properties located across the midwest. The fund’s goal is to provide greater diversification and achieve above-average capitalization rates.
Feel free to contact us today to learn more. We look forward to chatting with you about your investing goals!