Why Investors Are Flocking to SFR
Renters Warehouse Blog
Investors: which property is best?
Are single-family rentals ideal? Or is it better to invest in multifamily; apartments, condos, and duplexes?
For some investors, multifamily housing is where it’s at. They appreciate the cash flow and lower risks of a multifamily. With a multifamily, you don’t have to worry about vacancy rates as much. If someone moves out, you’ll still have the other units renting and generating income.
While multifamily can be an ideal choice for some investors, there are a number of reasons that both small, and institutional investors alike have been increasingly turning their sights to single-family.
Single-family rentals, while they might be less flashy than their multifamily counterparts, have some unique and tremendously valuable benefits that are catching the eye of many investors. For one thing, SFR offers both immediate returns in the form of rental income; but it also tends to experience long-term good appreciation as well. When it comes time to sell, SFR is also easier to shift –and tends to sell faster. Plus it’s more liquid than multifamily –you can sell just one or two of your properties, for instance, no need to sell the whole property.
In addition to appreciation and flexibility, there are some other distinct benefits of SFR. Let’s take a look at some of the reasons that many investors today are turning their attention to SFR.
Strong Market Conditions
One of the main factors that are driving investors’ interest is the increasing market demand for SFR.
We’re seeing an increase in tenant demand for single-family rentals, and with a shortage of available housing stock, demand only continues to grow. Additionally, the decline in homeownership rates and rising home prices that are putting pressure on SFR rents.
“The single-family rental market is very healthy right now. The demand versus supply balance and the operating outlook for revenue growth over these coming years is more favorable versus most property types,” said John Pawlowski, an analyst at Green Street Advisors, to CNBC.
Homeownership rates have declined by 3.6 million since 2009, according to Roofstock, meanwhile, the number of renters has increased by 1.9 million.
A Lower Entry Barrier
Another key benefit of SFR is that it’s more affordable. While buying an apartment building would require a significant outlay of capital, and would be harder to get funding for –obtaining an SFR property is much more straightforward. This is one reason that many investors get their start with SFR –or a duplex if they do go multifamily.
Potentially Higher Rental Income
Single-family homes tend to rent for more than their multifamily counterparts. This isn’t always the case, of course, but it is often this way, especially if the property is in the right location and has the right amenities –a garage, a yard, room for pets –people are often willing to pay more for these features.
Over the last fifteen years, and even when factoring in the recession, SFRs generated excellent returns –both in the form of rental income, and appreciation. Between July 2018 and 2019, for instance, rents increased nationally at a rate of 3%.
Opportunity for Diversification
When you buy a multifamily building, you’re putting all of your eggs into one basket. But with SFR, you can diversify if you choose to invest in property that’s located across a number of different markets. Spreading the risk gives you some protection from local market conditions, and small ups and downs.
Lower Tenant Turnover
Tenants in SFR properties tend to stay longer than they do in apartments. This is especially true when it comes to properties with two or three bedrooms. Most renters in SFR are families who are looking to settle down and stay awhile, while multifamily rentals or apartments tend to attract younger demographics that will eventually will move out and move on. The lower your tenant turnover rate, the less money you will be spending on repairs, advertising, and vacancies.
More Tools and Resources to Make SFR Investing Easier
One of the key reasons that multifamily properties were tremendously popular with institutional investors, was the ease of management. You could hire a property manager to oversee the building for you, no need to piece together a group of property managers to manage different properties at different locations.
But while SFR investing traditionally required a lot more hands-on work than their multifamily counterparts, things are changing. Today, many operational difficulties have been removed, and there are tools and resources available to make SFR investing easier than ever. Additionally, property management services have also come a long way, and can now provide services for SFR at scale.
“The operating backdrop for them is quite sound, and they’re better at what they do today versus the early days of this sector,” says John Pawlowski, “they’re better operators, they have more refined systems.”
These developments, along with the advent of tools that help to streamline the acquisition and disposition of portfolios, have enabled institutional investors to get in on SFR investing.
Tips for SRF Investing Success
Your success with an SFR will depend on the property in question, and how well you’re able to execute a successful investing strategy. With this in mind, here’s a look at a few tips for successful SFR investing.
- Set Goals and Establish Your Investing Criteria
First up, you’ll want to look to create an investment strategy taking into account both your current circumstances and your future financial goals. What do your big-picture goals look like? What are you hoping to gain from your real estate investments? Next, you’ll want to determine what you’re looking for in each of your properties –cash flow, appreciation –or both, then set a percentage or number that you’d like the property to yield each month. This approach allows you to refine your search, and will help you to focus on high-yield properties that’ll help you to reach your financial goals.
Tip: Some investors find it helpful to assign a life goal to each property. So for example, you could aim to invest in three or four properties for a source of income during retirement, or one property for your child’s future college fund.
- Consider the Local Housing Market
Next up, where you invest is tremendously important when it comes to the long-term success of your property. Just as important as the individual property in question, is the location you’re investing in. While housing markets in many major metropolises across the country are out of budget for most investors, there are still plenty of areas that are ideal for investing in rentals –where property is affordable, and returns are decent. Experts recommend looking for areas that are located outside of booming cities, places that are up-and-coming; expected to experience growth.
Tip: Have a property market in mind? Be sure to check out the Renters Warehouse Research Center –find key data on the local housing markets, including employment figures, housing appreciation rates, and more –gather data that you need to make key decisions, enabling you to quickly and easily assess the health of the local housing market.
- Have a Plan for Property Management
How well your property is managed is another factor that’ll impact the success of your investment. While many investors dive in without a clear plan for property management, it’s important to determine whether you’re going to oversee your property yourself, or outsource it to someone else. If you’re investing in an out-of-town property or are short on time, you’ll want to consider enlisting the help of a professional property manager who will be able to keep everything rolling smoothly in your absence.
- Run the Numbers: Make Sure It’s a Viable Investment
Not all investment properties are created equal. Make sure you run the numbers to assess how profitable a potential property will be, to make sure it’s worth investing in. You’ll want to ensure that it’ll produce the returns that you’re looking for, ones that are in line with your investing criteria.
A few numbers that you’ll want to run include:
- Cash Flow
Tally up your projected income and expenses to find out how much your property will generate in cash flow. To get an idea about potential income, take a look at other similar properties on Zillow or Trulia and see what they’re renting for.
- Cash on Cash Returns
Your cash on cash returns are the ratio of annual before-tax cash flow that you’ll be generating compared to the money you paid out of pocket for the property.
Cash-on-Cash Returns = Net Operating Income (NOI) / Total actual cash invested
- Cap Rate
Finally, you’ll want to find your cap rate. Your cap rate is your net operating income (NOI) as a percentage of the sales price. The higher, the better.
Cap Rate = Net Annual Income / Purchase Price
While multifamily and single-family rentals can both be great investments, there’s a reason that many investors –both first-time and institutional are turning their attention to SFR. Demand is high, it’s relatively easy to get started with, and with the right approach, it can generate excellent returns –both immediate and long-term.
Single-family rentals represent a $3 trillion industry. There are plenty of opportunities out there, and with the myriad of tools and services that are available today, it’s never been a better time to invest. If you’ve been on the fence for a while, why not make this the year that you start?
Looking to get started with SFR but not sure how to take that first step? Check out: What Every First-Time Investor Should Know and Real Estate Portfolio Guide: Starting and Growing the Right Way.
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