Why Invest in Single Family Rentals?

A vital ingredient to a strategically optimized portfolio

The Upfront Benefits of Single Family Rentals

The Pre-Investment Phase

Ample Opportunities

According to the latest U.S. Census Bureau, there are 85 million single-family homes in the United States. The average length of homeownership clocks in right around 13 years. That means 6.5 million homes are placed on the market each calendar year, resulting in plenty of opportunities for savvy investors to choose from.

Objective Decisions

When buying your primary residence, emotions are high. You and your spouse can get hung up on cosmetic finishes, school zones for children, and the size of the backyard. You might even form an emotional attachment to certain properties. But with single family rentals, it’s nothing more than a numbers game. The numbers either work or they don’t. It’s as simple as that.

Investor Advantages

When purchasing single family homes, your main competition is homebuyers looking for a primary residence. This gives you a distinct advantage. As an investor, you can write more appealing offers – including larger down payments, fewer contingencies, and faster closing dates – which increase your chances of getting a good deal.

The Ownership Benefits of Single Family Rentals

Conventional Financing Cons

Self-Financed Properties.

As long as you’re smart about the properties you invest in, you should be able to effectively “self-finance.” In other words, the rent payment you receive should cover all of your expenses (and then some). And as the loan is amortized over time, an even larger percentage of each monthly rent check goes toward paying down the principle on the property.

Owning an investment property is like having a monthly cash distribution. Just open up your bank account each month and the rent check is safely deposited.

While it’s the ongoing cash flow that most investors are after, don’t underestimate the long-term appreciation. Real estate values almost always increase over any five- or 10-year period. (Sometimes quite substantially.) Not only does this increase your borrowing power (via a HELOC), but it also gives you a nice bump in equity when you choose to sell.

Single family rentals are some of the most tax-advantaged investments you can own. Not only are operating expenses deductible, but so is mortgage interest and depreciation. And depending on how you set up your investments, you can qualify for pass-through deductions as well.

Typically, you have to pay capital gains taxes when you sell an investment or other asset. But with real estate, you benefit from an IRS code known as the 1031 Exchange. This allows you to take the proceeds from the sale of one investment property and invest it into another similar property and defer tax payments. This basically lets you kick the can down the road, paving the way for rather substantial wealth creation.

Most investments decline in value during a recession. Rental real estate? Not so much. The demand for rental properties actually increases during times of economic uncertainty. That’s because fewer people buy homes. And as interest rates rise, a large chunk of middle class America gets priced out of the market.

Inflation says that the same products will be more expensive in the future than they are today. It’s why a loaf of bread used to cost $0.10 or $0.12 in 1950, yet costs $3 to $4 today. It’s not that people like bread more today than they did 70 years ago. And it’s not that the ingredients or recipes have changed dramatically. It’s simply a result of economic inflation. Unfortunately, consumers take the brunt force of most inflation. But by purchasing real estate – which typically increases in value faster than inflation – you can hedge your portfolio.

The Point-of-Sale Benefits of Single Family Rentals

The Cash-In Phase

Plenty of Buyers.

When you own a single family rental property, you almost never have to worry about demand (at least on a macro scale). Unlike multi-family properties, commercial properties, industrial facilities, or raw land, there are always a large number of potential buyers for single family homes. Not only that, but you appeal to both traditional homebuyers and real estate investors. (When someone sees that the house is currently being rented, it gives them encouragement that they could purchase it as a rental property, too. The average first-time investor is more likely to purchase an existing rental property than they are to buy an owner-occupied house and turn it into a rental. They like the “proof of concept” that it offers.)

Motivated Buyers.

When you buy a single family property as an investor, you’re highly objective. You let the numbers do the talking. But when you sell to a typical homebuyer, they’re often ruled by emotions. This plays to your advantage. You’re dealing with motivated homebuyers who might overpay if they find themselves in a bidding war.

Purchasing Power.

When you cash out of an investment property that you’ve owned for several years, chances are you’ve built up a considerable amount of equity. This gives you lots of purchasing power and plenty of options. For example, you could take advantage of a 1031 Exchange and roll all of the profits into a similar investment property. Or you could take the cash and use it to fund something else. You can even use the proceeds to buy multiple new investment properties by putting just 20 percent down on each.

“Real estate cannot be lost or stolen, nor can it be carried away. Purchased with common sense, paid for in full, and managed with reasonable care, it is about the safest investment in the world.”
– Franklin D. Roosevelt, U.S. president

“Ninety percent of all millionaires become so through owning real estate. More money has been made in real estate than in all industrial investments combined. The wise young man or wage earner of today invests his money in real estate.”
– Andrew Carnegie, billionaire industrialist