The Simple Guide to Single-Family Rental (SFR) Investing
December 2, 2022
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Single-family rentals (SFRs) are often known for offering stability, predictability, and consistent returns that may be hard to find in any other investment and can be a way to build your wealth. However, SFR investing can be daunting and comes with its own risks; there's a lot to learn!
In this guide, we'll walk you through SFR investing basics and give you tips for getting started. So whether you're just beginning to think about real estate or ready to take the plunge, keep reading to learn more.
What Is SFR Investing?
SFR investing (or single-family rental investing) is a real estate investment involving purchasing and managing standalone homes and renting them out to tenants. SFR investing can offer attractive benefits compared to other real estate investments, such as multifamily properties and commercial real estate.
SFRs are typically more affordable and easier to finance than larger properties, making them a more accessible investment for many people. In addition, SFRs offer the potential for higher returns than other asset classes because many people prefer to live in a home, making them an attractive investment option that can generate a steady source of rental income.
Why Investors Like SFRs
SFRs have been a popular investment for many years due to their strong historical performance and the advantages they offer real estate investors. They tend to be much less volatile than other investments, such as stocks or mutual funds. Investors can feel confident knowing their investment is less likely to lose value sharply in a short period.
SFR properties also offer the potential for higher returns. While there are no guarantees with any investment, single-family rentals have the potential to provide investors with cash flow and appreciation over the long term.
Additionally, SFRs allow investors to build a large, diversified investment portfolio. By investing in multiple SFRs, investors can spread their risk across several properties (even in different locations across the country) and reduce their overall exposure to any particular property or asset.
A quick look at the stats helps explain why a growing number of investors are focusing part of their capital on SFR real estate investing:
- According to Zillow, home values in the U.S. have increased by about 90% over the past eight years.
- Based on the most recent data from the Federal Reserve, the median sales price of houses has increased 25X since 1963. Sixty years ago, the median home sale price was $17,800 (Q1 1963); today, the median sales price is $454,900 (Q3 2022).
- Arbor Realty Trust, a national direct lender that provides debt capital to the real estate industry, shows SFR rent growth through the middle of 2022 was 14.8%, occupancy rates are 94.9%, and cap rates average 5.3%.
When it comes to rental investing, many believe there’s simply no comparison to single-family homes (SFRs). As the Commercial Observer notes, “single-family rentals are expected to achieve higher risk-adjusted returns than apartments and traditional commercial real estate property types overall.”
Single-Family Rental Investing Basics
Now, let’s review the basics of SFR investing and the best practices for an investor to follow. We’ll also examine some of the financing options available for SFRs.
First, there are two main types of SFR investments: passive (or hands-off) and active (or hands-on).
Passive investments involve buying a property, hiring a property management company, and then leasing it to a tenant. The investor receives regular rental payments from the tenant, out of which operating expenses, such as repairs, the mortgage, taxes, and insurance, get paid. Other forms of passive investing include purchasing fractionalized shares in a property, SFR REITs, and SFR crowdfunding platforms.
Active investments involve renovating and managing the property yourself. This hands-on approach can be riskier, but it also offers the potential for higher returns.
No matter which type of investment you choose, there are some basic steps that all investors should know about. Let’s take a closer look at each of these steps, assuming you want to take on an active approach.
Locate an SFR
When seeking suitable single-family properties, it’s important to remember that any property is only as good as its location.
You want to find a neighborhood that is growing or has growth potential and research recent sales data to make sure you’re getting a fair price. Be aware of any zoning changes or development plans that could impact the property's value in the future.
Run The Numbers
To ensure you’re getting a good deal on an SFR investment, consider both the purchase price and the potential return on investment (ROI). Generally, the lower the purchase price, the higher the potential ROI.
However, beware of deals that sound too good to be true, as they may have hidden costs or other problems. Additionally, investors should always inspect a property before making an offer to determine its condition and identify any potential repairs.
Buying The home
Once you’ve found a residence and are ready to buy, it’s time to get your financing in order. Many financing options are available for SFR investors, including traditional mortgages, private loans, and hard money loans. Shop around until you find the best financing option for you and your investment objectives.
Find Qualified Tenants
Having invested in your SFR property, you must now find tenants. This process generally involves advertising the property online and screening applicants for creditworthiness and references.
You should maintain a written lease agreement with all your renters and ensure rent gets paid on time. Additionally, as an investor, keep track of any repairs or maintenance required on the property and factor these costs into the rent price.
You must Protect your investment by acquiring proper insurance and managing your property well. Maintain accurate records, screen tenants carefully, and have a plan for unforeseen expenses.
Plan for The Unexpected
Finally, investors should always prepare for any unexpected problems with their SFR investment. That may include late rent payments, property damage, or legal issues with tenants. If you plan ahead, you can minimize the risks associated with your single-family rental investment.
By following these basic guidelines, you can increase your chance of success with SFR investing. However, remember that the real estate market generally moves through cycles of highs and lows, so it's essential to have a long-term perspective when investing in this asset class.
Things to Consider Before Buying Your First Rental Property
Buying an SFR can be ideal for investors getting started in the rental market. By doing your homework and understanding the ins and outs of this investment, you can make an informed decision that is right for you. When purchasing a rental property, there are a few things to keep in mind as an investor:
- Do your research. Look at different neighborhoods and determine what type of SFR would be a good investment. For example, locations with high crime rates are likely not wise places to purchase an SFR.
- Make sure you understand the market dynamics for SFRs in your area. What are the average cap rates and cash-on-cash returns? How long do most leases last? What is the vacancy rate? By understanding the market conditions, you can better assess whether or not purchasing an SFR makes sense for you.
- Get pre-approved for a loan. You’ll show potential sellers you're serious about buying and know what you can afford.
- Don't overspend. It's important to remember that you're not just buying a home—you're also investing in a rental property. Don't buy beyond your means simply because the numbers look good on paper.
- Cash flow is king. Ensure the property will generate enough income to cover all your costs, including mortgage payments, taxes, insurance, and repairs.
- Have a solid rental strategy in place before purchasing. Know what type of tenant you're targeting and how you'll screen applicants.
- Be prepared for maintenance and repair costs. These can add up quickly, so be sure you have enough cash saved to cover these expenses when they arise.
- Consider your own skills and limitations as a landlord. Perhaps you don’t have much experience managing properties or dealing with repairs. In that case, it might be wise to avoid self-managing your SFR and hire a property management company instead.
- Think about your long-term plans. If you eventually plan to sell the property, make sure it's in a market that is favorable to investors.
- Don’t forget about taxes! When buying an investment property, you need to know all the associated tax implications. For example, will you be subject to Self-Employment Tax on your rental income? Are there tax breaks available to you? Speak with an accountant or tax advisor to understand how owning an SFR will impact your tax liability.
How to Get Started with Passive SFR Investing
Passively investing in SFRs can be done using debt or equity. Equity investments are when you own part of the SFR and get a share of the potential profits. With debt investing, you lend money to an SFR borrower and earn interest income until the loan gets repaid.
Debt SFR investing offers two distinct advantages: First, it can be lower risk than equity SFR investing because you have legal recourse if your borrower defaults on the loan. Second, debt SFR investing can provide higher yields than traditional fixed-income investments, such as bonds and CDs.
SFR investing through debt can be a way to generate higher yields than traditional fixed-income investments while reducing risk exposure. Concreit makes it simple for investors to take advantage of these features with fixed-income first-lien mortgages.
With the help of Concreit’s expertly-managed strategies and curated assets, investors now have easy access to alternative SFR investments. You can start investing with Concreit at any amount.
This information is educational, and is not an offer to sell or a solicitation of an offer to buy any security which can only be made through official documents such as a private placement memorandum or a prospectus. This information is not a recommendation to buy, hold, or sell an investment or financial product, or take any action. This information is neither individualized nor a research report, and must not serve as the basis for any investment decision. All investments involve risk, including the possible loss of capital. Past performance does not guarantee future results or returns. Neither Concreit nor any of its affiliates provides tax advice or investment recommendations and do not represent in any manner that the outcomes described herein or on the Site will result in any particular investment or tax consequence.Before making decisions with legal, tax, or accounting effects, you should consult appropriate professionals. Information is from sources deemed reliable on the date of publication, but Concreit does not guarantee its accuracy.