Renting out your old home or starting your investing career with single family houses is a great way to break into the world of rental real estate. With an estimated 25 million single family home renters in the United states, it is no surprise that single family houses are one of the most stable and low-risk types of rental investments. Below we take a deep dive into everything you need to know about single family rental properties.
Single Family Rental (SFR) Property Definition
A Single Family Rental (SFR) Property is a stand alone detached structure that is usually on its own lot with a yard and garage, which is rented out to tenants for the purpose of tenant dwelling and landlord profit.
Pros and Cons of Investing in Single Family Rental (SFR) Properties
There are many factors to consider when determining whether or not to invest in rental real estate, specifically single family rental properties. The following is a comprehensive list of the pros and cons you need to know before investing in single family rental properties.
Pros of Single Family Investing
- Longer Tenancy Occupancy – Tenants of single family homes are likely to be long term tenants with less turnover for reasons such as a desired school district, saving to buy a home for themselves, or the inability to afford the large down payment for a similar quality home.
- Easier to Obtain Financing – Obtaining a loan to purchase a single family property can be easier than qualifying to get a loan for a multifamily or a commercial property. Single family home loans are mostly based on the borrowers financial profile and ability to pay.
- Lower Maintenance and Overhead – Since single family properties have fewer fixtures and appliances, this means that there are less things likely to break. Overhead such as an onsite manager, laundry facility, or large dumpster is also not necessary as might be needed in a multifamily property.
- Ease of Management – Larger properties with multiple tenants such as a retail shopping center, require constant attention to maintain and operate. With only one tenant and one structure to deal with, your rental property management responsibilities and possibilities for potential issues are greatly minimized and simplified.
Cons of Single Family Investing
- One Tenant Risk of Vacating – While you only have to deal with one tenant, your property’s cash flow is also at the risk of that one tenant staying or vacating. Tenant turnover is a normal part of the rental real estate business, but should be something that is closely monitored to ensure too much turnover is not negatively effecting cash flow.
- Less Rental Income – Single-family homes don’t generate as much cash flow as multi-tenant properties for one obvious reason – you only collect rent from one tenant every month. This can become an important issue when ownership costs increase faster than rental income.
- Longer Time to Generate Return – Since there is less rental income, it can take longer to see a return on your investment, especially when factoring in unexpected rental property maintenance issues. It’s not uncommon for a single family rental investment property to take several years before generating any real profits.
- Difficult to Source Good Deals – There is always consistent demand by both families and investors for single family homes. With such demand for these limited assets, finding a good deal can become a challenge especially in a desirable market.
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Managing Single Family Rental (SFR) Properties
Managing one or a few single family homes is among the easiest of all types of rental real estate asset classes since you only need to deal with one tenant and one structure. If it is a newer construction structure then maintenance issues will generally be less frequent than those of an older property. If you decide to build up a large portfolio of single family homes, this is where management can get more complicated. Each home (property) requires its own mortgage, insurance policy, property tax payments, and accounting records, and keeping track of all these accounts can become difficult to manage. This is one reason most investors eventually switch to multifamily properties. Multifamily properties allow investors to increase unit count and cashflow, while consolidating responsibilities to one property.
Financing Single Family Rental Properties
Aside from your own home, securing a loan on a single family house is among the most obtainable types of investment real estate loans to get. A common beginner strategy is to get an “owner occupied” loan on the house, then live in it for a period of time, and rent it out afterwards. Lenders will usually want to see things like tax returns, paystubs, and require a property inspection report and appraisal. On a large portfolio of single family homes individually financed via conventional loans, it is important to note that there is a limit on the amount of conventional loans that any individual can have.