Why You Should Start Your Investing Journey With Single-Family Rentals

In this article

Single-family rentals are the shining stars of the real estate market.

Even in the most challenging of times, occupancy rates across all single-family rental regions are at nearly 95%, rent growth is increasing year-over-year, and institutional investors are pouring billions into single-family rental homes.

While there’s no such thing as a guaranteed home run in real estate, investing in single-family rental houses may come pretty close. By choosing the right home in the right market, investors can minimize risk and maximize potential rewards.

Let’s take a closer look at why most people should begin their real estate business by investing in single-family rentals.

---

---

Single-family vs. multifamily

There’s an age-old debate among real estate investors about whether multifamily properties or single-family houses make the best rental investments.

It wasn’t that long ago that beginning investors would start by buying single-family homes before eventually moving up to multifamily.

Today, the opposite trend is taking place, with more people than ever investing in single-family houses. There are several reasons why most people are starting and sticking with single-family rentals.

• Cap rates and returns in most markets are much higher on single-family rentals compared to multifamily.
• There are more single-family homes to choose from, with single-family units making up about 67% of the housing stock.
• Single-family homes are much more affordable to buy than multifamily buildings.
• Sellers of single-family homes have multiple exit strategies, such as selling to an owner-occupant, the tenant, or another investor.
• Single-family homes also sell faster, with houses in many markets going under contract less than 30 days after being listed for sale.

Top benefits of single-family investments

Single-family rentals can provide immediate benefits for people just beginning their real estate investing career.

Cash flow

Generating passive monthly cash flow from rental property is one of the main reasons to begin investing in single-family houses. Net cash flow is the money left over at the end of each month after the tenant rent is collected and all of the operating expenses and mortgage have been paid.

For example, if you purchase a single-family rental house for $100,000 using the 1% rule, you should receive $1,000 each month in rent. After expenses, your net cash flow could be about $200. At first, that may not sound like a lot. But after five years, the total cash flow generated would be $12,000, which you could then use toward the down payment on another rental property.

Appreciation

Appreciation in property value is another benefit of investing in single-family homes. Over the past ten years, average house prices in the U.S. have increased by 10.82% annually, according to the Freddie Mac House Price Index (FMHPI) report.

Of course, home prices in some real estate markets increase faster than others. Sun Belt cities like Huntsville, Alabama, and Phoenix have enjoyed annual home value increases of nearly 15%. On the other hand, large urban areas such as Los Angeles, New York, and Miami have seen home prices increase less than the national average.

Tax benefits

Real estate investors receive a number of tax write-offs from the IRS. Costs of owning and operating a rental property, such as routine maintenance and repairs, property management fees, taxes, and insurance are fully deductible.

Depreciation deductions are used to decrease taxable net income even more, while 1031 exchanges allow real estate investors to sell one property and buy another and not pay any capital gains tax.

Inflation hedge

The average annual rate of inflation in the U.S. is about 2% per year, according to the Federal Reserve. That means if you have money sitting in a bank account, it loses value or purchasing power little by little, year after year.

Owning real estate is a perfect hedge against inflation. According to the Freddie Mac index, annual house prices in the U.S. have increased by nearly 11%. In other words, home prices have grown more than five times faster than the rate of inflation.

Tenant stickiness

One of the biggest risks of owning rental property is that if the tenant leaves, your cash flow disappears, at least until the property can be rented again. In real estate, the word “stickiness” refers to how likely a renter is to stay or go.

Single-family houses have a high level of tenant stickiness, which means tenants are more likely to stay year after year. This means the odds of having a vacancy are lower compared to other types of rental property, like apartments.

There are several reasons why tenants prefer renting a single-family house.

• Privacy, thanks to no other renters nearby, no noise coming through the wall, no kids running around, and no cooking odors from the neighbor down the hall.
• Houses have more space than apartments so they are perfect for a wide variety of renters, including millennials, families, baby boomers, and people working from home.
• Tenants become attached to a single-family home, even if they don’t own it, and the longer they stay, the less they want to leave.
• Single-family homes have plenty of room for storage in the closet, basement, attic, and garage.
• Homes come with private backyards and other conveniences such as garage parking, a private washer and dryer, and a nice-looking front yard.
• Neighborhoods and school districts are usually better where single-family homes are, making it easier to attract a quality renter.

Easier financing

Single-family homes are easier to finance than multifamily properties. Everyone understands what a house is, and lenders view loans on homes as being less risky than multifamily and commercial real estate.

Beginning real estate investors have plenty of good options for financing a single-family rental home. Conventional fixed-rate loans have the same low interest rate and mortgage payment over the life of the loan, and typically have loan terms of 15 or 30 years.

Other options for financing rental property include home loans backed by the Federal Housing Administration (FHA), VA loans, and alternative lending such as short-term hard money loans or private lenders who specialize in working with real estate investors.

Remote real estate investing

Housing prices in some high-cost urban areas are skyrocketing out of control. That’s good if you already own a home, but not so good for investors trying to find an affordable single-family home to buy. In Los Angeles, for example, the median price of a single-family home is about $900,000. That means an investor would need a down payment of $225,000 to buy just one house.

The good news is that online platforms simplify the process of remote real estate investing in markets across the country where single-family home prices are lower and returns are higher. Today, investors no longer need to live in the same city they buy rental property in.

It also means the investment dollar goes much farther. In high-growth markets such as Charlotte, North Carolina, and Nashville, Tennesse, house prices are about 66% lower than in LA. By hiring a local property manager to take care of the house and the tenant, remote real estate investors can buy more rental property while collecting passive income every month.

There’s no doubt that the single-family rental market is hot, and real estate experts predict that the demand for single-family rentals will keep growing in the years ahead. Buying a rental house can be the perfect first step for a beginning real estate investor.

Tenants would much rather live in a house than an apartment, rental income keeps increasing each year, and remote real estate investing streamlines the process of owning rental property in markets where homes are affordable and potential returns are high.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.