It’s an ongoing debate which is the most valuable: multifamily homes or single-family estates. On the one hand, multifamily homes and apartments are easier to scale. You can buy 80 or more apartments at one time, so you’ve got continuous cash flow from multiple sources.
On the other hand, your biggest worry is a high vacancy rate. With around 50% apartment turnover a year, that’s what you’re bound to get.
Single-family rental tenants, on the other hand, are likely to stay years, the value of their homes tends to appreciate, and they’re the most motivated and reliable tenants.
For Warren Buffet, single-family rentals (SFR), if held for a long period of time and purchased at low rates, were even better than stocks. He advised buyers to take out a 30-year mortgage and refinance if rates go down.
“I’d buy up a couple hundred thousand single family homes,” he famously told CNBC in 2013, “if it were practical to do so.”
Investing in SFRs makes even more sense in our post-pandemic recovery, when desirable areas across the U.S. are seeing a real-estate boom.
What Is a Single-Family Rental (SFR)?
In contrast to multi-family homes where two or more families live in two or more units in the same building, single family homes are those standalone properties that have their own parcel of land for the private use of the owner. They also have private and direct access to a street or thoroughfare, in contrast to an apartment or on-campus that shares hallways and lobbies, and their own set of utilities. Most have one kitchen.
In short, single family homes are built for one person, one family, one household. They’re always on the market and never as adversely affected by fluctuations in the real estate cycle as other types of properties.
Actually, SFRs are a third of all U.S. rental properties, with Noel Christopher, SVP of Corporate Development for Renters Warehouse, one of America’s leading SFR investment services companies, telling leverage.com he anticipated 13 million new SFRs by 2030.
Can an SFR Be Considered Commercial Real Estate?
If it’s a single SFR, no. That property is purely residential real estate.
So why are we talking about single-family homes? After all, our mission is for leverage.com to become the best commercial real estate site on the web, not residential.
Allow us to explain. If you own many SFRs, that portfolio could be considered a commercial real estate asset. For example, let’s say you own every townhouse on a block. All of them are connected and constructed the same way. Each townhouse is still an SFR, but the entire block is a CRE property. This development structure is common in many parts of the U.S., including New York City, Philadelphia and parts of New Jersey.
Are Single-Family Rentals a Good Investment Compared to Multifamily Rentals?
Most people who invest in multifamily rentals (MFRs) and apartments do so because of their potential to scale faster. They forget the costs of rapid turnover and vacancy rates, both of which hit apartments three to five times higher than they do SFRs. Repairs from tenant turnover cost you around $2,500 per tenant, while loss of rent while the unit is vacant easily rises to over $3,000 per unit, according to the National Apartment Association.
With SFRs, tenants tend to stay at least three years. Your vacancy rates are lower, because demand for these homes remains stable even during pandemics and recessions.
Single family tenants are mostly high quality, so your rental maintenance costs tend to be less. For these and other reasons, there’s a steady market demand for SFRs. According to Clayton Morris of Morning Invest, if your bottom line is to meet your financial freedom number — which for most people is about 4K extra income a month — well then with six single family homes that cost you 20-60K including a rehab, you get a solid passive return of $800-$900 a month cash flow that more than meets your needs.
8 Advantages of Investing in Single-Family Rental Homes
There’s a good reason many Americans, currently, choose single family homes to invest in. After all, SFRs not only lead the way in real-estate — think more than half of the population rent these homes (52%) — but it’s also a solid market for reasons that include the following.
1. Large Buyer Pool
Single family homes are always around. There are far more families looking for a home and yard of their own, even in the worst of markets, than renters interested in other property niches. Find an up-and-coming neighborhood, rehab the home and you’re more likely to find tenants far easier than you would renters interested in duplexes, triplexes and other multiplex income property and certainly buyers for commercial property.
Mat Piche of RE/MAX said, “We always get tenants within a week or two; maximum before the end of the month because we buy in the right areas and renovate to a high-quality finish.”
2. Higher Rents
You can rent an SFR for much more than you can an apartment per unit. True, MFRs, student properties and apartments may make you more money cash flow-wise, but they demand far more attention and expense. Think of all that turnover. You risk losing out in the long run.
3. They Appreciate Fastest
An SFR could be vacant, but as long as it’s in a desirable area, it has value. Renters willing to buy in that area will always pay the price. Commercial property, on the other hand, is evaluated on how much income it produces. If the property is not income-producing, its value depreciates.
4, Little Turnover
With multifamily, turnover is your biggest concern. Each time a tenant moves out, you’ve got the cost of potentially extensive repairs. Plus, there’s the risk of vacancies which rises above 20% with apartment complexes, compared to the three to five percent vacancy rate of single family homes.
Tenants of SFRs tend to stay longer than those in apartments or MFRs do, because they like the idea of pursuing home-ownership as well as of having their own space. Your biggest costs come from tenant turnover. Go the SFR route and you avoid that concern.
5. SFRs Sell Quickly
You can always sell an SFR faster than you can apartment complexes or even MFRs. The logic’s simple: There are more people available to buy single family homes than people ready to swoop up warehouses or apartment buildings that could sit on the market months before they’re claimed. That’s in contrast to homes that Zillow estimates spend just 25 days on the market before going under contract. Need money in a hurry? The single family home is the answer to your prayers.
6. Rents Increase Quickly
You can raise rents faster than with other properties, especially if you buy in desirable areas. That’s because there’s consistent demand for SFRs and an associated emotional factor (homeownership is the “American Dream”), with far more families looking to rent their own homes than there are renters interested in duplexes, four-plexes and so forth.
Single family tenants want the prospect of solid sustainable areas with job growth, their own yards, a safe and friendly community and quality schools — and they’re more than ready to pay hiked rents to keep their grip on their homes. In short, consistent strong occupancy rates in this market give landlords, like you, pricing power.
7. Motivated Sellers
SFRs are often put on the market by desperate owners who need to relocate or sell in a hurry. The home usually needs a certain amount of repair — not necessarily a lot — and you’re able to capitalize on their desperation to get a huge return for your investment.
8. Less Demanding and More Reliable Tenants
Tenants in apartment buildings want 24/7 onsite staffing for their problems. With SFRs on the other hand, all you need is a far less regular, off site, minimal maintenance crew with its maintenance line and a special number for emergencies. Incomparably cheaper!
In the same way, tenants in multi property homes (certainly students!) tend to be lower quality, higher maintenance and more expensive. Renters of SFRs, however, are your most conscientious buyers, because they typically work higher-paying jobs and are responsible stewards with families.
“Over the nine years I’ve been investing in real estate,” Matt Piche told leverage.com, “I’m now up to 23 properties. I’ve only had one incident, where a tenant didn’t pay rent and I had to go through the eviction process. Even then it was seamless… and that’s why I like single-family properties.”
To recap, it makes sense that Warren Buffet prefers investing in SFRs to investing in stocks. SFRs are less volatile than stocks, bonds or most other investments. They’re more tangible. They give you a steady income. Likewise, they’re also inflation-proof and, for first-time real estate investors, they’re the easiest property to manage!
How Has Single-Family Rental Investing Been Impacted by COVID?
The single family home has been the fastest growing segment of the housing market since 2006, and the pandemic’s made this niche a winner, according to data collected from the Single-Family Rent Index (SFRI), The Urban Land Institute (ULI) and Statista 2021, among others.
Unsurprisingly, the pandemic prompted Americans to prefer their own space, to chase assets that hedge against inflation, to seek passive income to fall back on in recessions, and to look for homes in the suburbs — all factors that helped make SFRs a favorable investment opportunity in 2021 going on to 2022.
In fact, the ULI predicted that soaring demand for SFRs will likely peak in the coming year, while Mortgage Professional America called the demand for SFRs “ravenous.” Add to that a strengthening economy and millennials nearing their peak home buying years, and you’ve got an investor’s dream.
Will this market overheat?
We seem to be at a tipping point where prices have slowed and maybe even reached pre-pandemic levels. On the other hand, reports by both the ULI and the Home Buying Institute predict that more homeowners will continue to sell their homes across the U.S. (again a result of the restlessness and displacement of COVID-19), resulting in a higher amount of opportunities in 2022 than the regular year for the SFR market.
Getting Started: How SFR Investing Works
It’s work. But there’s a logic to the process…
Where Do I Find Single-Family Investment Properties?
Try these resources for starters:
- Crowdfunding Platforms Roofstock or CrowdStreet. Roofstock is for accredited real estate investors, Crowdstreet for the mom-and-pop property investor. Both platforms offer vetted and reviewed SFRs that generate cash flow from day one.
- Multiple Listing Service (MLS) is the famous subscription database on for-sale properties open to licensed real estate agents.
- Privy is the MLS counterpart for mom-and-pop property investors.
- Leading online real estate platforms like Zillow or HotPads.
- Auctions. They’re the risky route because you barely know what you’re buying. Homes are auctioned online, just as goods are on eBay. Hubzu and Auctions are the largest U.S. real estate auction online platforms.
- FSBO (For Sale by Owner). Look for signs in yards, ads on CraigsList, postings in social media, or billets in libraries and cafeterias.
- Online real estate marketplaces such as Facebook Marketplace, HudHomesUSA, Opendoor, OfferPad and Knock.
How do I identify SFRs?
They’ll have an “R”, standing for Residential, followed by a number in their descriptions. Single family homes are rated R1, duplexes are R2 and multi-family homes, usually apartments or condominiums, are R3.
6 Steps for Finding and Buying that Single-Family Home
It’s really a 1-2-3 plan that needs methodical attention.
1. Set Your Objectives
What do you want?
- A legacy home for your family that lasts generations?
- An asset for appreciation that gathers value in the holding period until you can earn your profit upon sale?
- A home for regular cash flow?
- A single family rental for business?
2. Plot Your Location
Where do you want to buy? It need not be in your immediate area. In fact, some of the pluckiest, savviest investors choose more remote spots, focusing on ROI rather than geographical closeness.
Factors to consider include:
- The region. Its popularity and centrality. Highly developed cities like San Francisco tend to be more expensive than sprawling areas, which mostly experience population decline.
- The safeness of the area. Check crime statistics.
- The accessibility, appearance and amenities of the neighborhood. Are there parks, schools, libraries, cultural facilities, attractive stores and restaurants and so forth? Does it have easy access to major transit routes?
- Development. What’s the desirability of the surrounding area? Public, commercial or residential development (such as the traffic and noise of an airport or fire station) can affect its desirability
- Lot location. A house facing a lake is likely to be far more valuable than that facing a hospital.
This heatwave map analysis could help you track your perfect location. Here’s a list of the 10 best cities for real estate investment this year.
3. Collect the Numbers
Homes are called “turnkey” because investors usually underestimate the long-term expense needed for their maintenance. These include:
- Fixed expenses like property taxes, insurance, routine maintenance, property management services, utilities and homeowner’s association dues.
- Variable expenses like unexpected repairs, significant capital expenses (e.g., a new roof), legal fees, loss of rental income and more.
Create a pro forma balance sheet, or estimate, to crunch these numbers.
4. Use a Rental Property Calculator
Rental property calculators (here’s a free one) calculate whether an SFR is worth your investment. Tap in key investment metrics such as the internal rate of return (IRR), capitalization rate, cash flow, and other financial indicators to find your ROI on the investment.
Your three most important investment calculations are:
- Net cash flow, which is the money produced, or lost, after your expenses. You calculate that by working out the difference between your expenses and your anticipated income.
- Cap rate, which is the formula used to evaluate the potential rate you’ll make on the SFR. Simply divide the property’s net operating income by its current market value
- Cash-on-cash return, which is where you work out how much it costs you to buy that SFR, divided by the total yearly cash flow. The higher the return the better.
5. Gather the Money
Unless helpful friends and family donate that money, you’d want a loan. Suggestions? Network for the best mortgage lenders at the best rate. Anticipate that you’ll need to plunk down at least 20% of the property for a down payment. Your lender calculates your debt-to-income ratio (i.e., your expenses versus your income) to determine your level of risk. Other calculations you might need include debt-to-equity and debt ratio.
6. Check out the SFR
Investors use these standard rules to decide if a property is worth buying:
- The 1% rule – Check whether monthly rent can be at least 1% of the total purchase price. Example: A single family home that costs $150,000 can give you a monthly cash flow of $1,500 for decent ROI.
- The 50% rule – You’ll want the operating expenses of the SFR to be roughly 50% of its gross income, including property taxes, insurance, vacancy losses, repairs, maintenance expenses, and owner-paid utilities.
- The cap rate – One of the most important metrics for determining your ROI, calculated as the ratio between the net operating income produced by your SFR and its original or current value.
Ready to Buy the SFR?
Congratulations — and now starts the work! Spruce your purchase for profit and check local rates to determine your rental figure.
- Negotiate: You may be able to get the property at a discount
- Ask local landlords and real estate investors their opinions on rental trends. They could point to up-and-coming areas.
- Plug-in a 5% vacancy estimate into your pro forma calculations.
- Question the seller’s incentive to sell. Also check the age of the house as well as the age, style and condition of home appliances. Look into the kitchen layout.
Bottom Line: More People Rent Single-Family Rental Homes Than Drive SUVs
Renters in the single family rental (SFR) space have the reputation of being boring. And that’s a good thing. These tenants are reliable, long-standing, conscientious and easy to get. They often stay for at least three years, which removes your greatest worry of tenant turnover. In essence, single family homes provide fewer headaches, higher returns, more stable investment — and a roaring market.
More than 10% of homeowners plan to sell their homes in the next 12 months. In fact, as Greg Rand, Executive VP of Coldwell Banker, said, “There are 17 million existing rental properties in America … that’s 12% of the population. There are more people living in single-family rental homes than driving SUVs. So it is a big market segment, much bigger than most people thought.¨