How to Invest in Single-Family Rentals

A single-family rental (SFR) property is a standalone residential home rented out to tenants, offering an accessible entry point for new real estate investors while also appealing to seasoned professionals seeking portfolio diversification. With rising demand for rental housing and the potential for appreciation, single-family rentals provide a balance of steady cash flow and potential capital gains.

This type of investment comes with its own set of benefits and challenges, but for those looking to build wealth through real estate, SFRs can be a relatively stable and rewarding option. Read on to learn more about investing in single-family rentals.

Understanding Single-Family Rentals (SFRs)

Investing in single-family rentals involves acquiring residential properties, such as houses or townhouses, and renting them out to tenants. Unlike multi-family properties, SFRs offer a unique opportunity to cater to individual families and provide them with a comfortable and private living space. This niche in the real estate market has gained popularity because of its lower barrier to entry and potential for long-term returns.

Is it a Good Idea to Invest in Single-Family Rentals?

Single-family rentals attract investors for the potential tax write-offs, expense deductions and the nearly passive income from long-term rentals. Purchasing single-family rentals in popular vacation destinations or near your primary residence can offer a familiar and simple path into real estate investing.

Purchasing single-family rentals in markets with greater opportunities can prove to be a profitable strategy. Should you purchase a single-family property and assume it will be successful? No! However, with research and commitment to both searching for desirable properties and later managing them, you could build an additional income stream and asset value.

Like all investments, single-family rentals require research and understanding of rental markets and hyper-local trends in target markets to identify opportunities. If you can build the knowledge to assess a property's potential and market trends, you can find undervalued properties for potentially larger gains.

Finding the Right Single-Family Rental Property

If you're ready to start, here's what you need to consider and research before investing in single-family rentals.

1. Location

You might have heard the cliches, but they are true. Location is everything in real estate. You can't overcome a poor location with fantastic amenities. Research the neighborhood thoroughly. Look for areas with low crime rates; good schools; amenities like shopping centers, parks and office space; and access to transportation. Consider up-and-coming neighborhoods for greater value in appreciation long-term.

Ideally, you should first identify neighborhoods or areas with the greatest potential. These become your target neighborhoods. Set alerts for online property listings in these areas, and if you live nearby, drive through the neighborhoods looking for 'For Sale' signs.

2. Property Condition

Once you find a property in the target neighborhood, inspect the property to ensure it is in good condition. Repairs and maintenance can eat into your profits if neglected. Get a professional inspector to check major systems, including the electrical system, HVAC, roof, foundation, walls, fireplaces, windows and doors. If you have to make property repairs, be sure to account for those in the total property cost.

3. Market Demand

Analyze the rental demand in the area. A property in a high-demand area will likely lead to shorter vacancies and higher rents. Check rental rates and vacancy rates for comparable properties in the area to determine what you can realistically expect. Speak with real estate agents for their opinions and experience with rentals in the area.

4. Future Growth Potential

Look for locations with potential for future development or infrastructure improvements that can positively impact property values. For example, an area with a new business complex or major mall planned for development can appreciate significantly. Likewise, new public transportation plans to improve the area's connectivity can lead to long-term growth. Check the municipality's website, and speak with other investors and real estate agents to understand an area's short-term and long-term growth potential.

Benefits of Investing in Single-Family Rentals

Here are some of the benefits of investing in single-family rentals.

• Steady Rental Income: Single-family rentals provide reliable monthly cash flow, with the goal of generating positive cash flow from the start, even after covering mortgage, taxes, and expenses.
• Appreciation Potential: Single-family homes often appreciate over time, offering capital gains opportunities when sold, and acting as a hedge against inflation. They also serve as a means to transfer generational wealth.
• Easier Management: Managing a single-family rental is typically simpler than multi-unit properties, with fewer tenants and less maintenance. Long-term tenants tend to take better care of the property, reducing the need for constant oversight.
• Diversification: Investing in single-family rentals adds diversification to a portfolio, reducing the risks of concentrating all investments in one asset class, and providing insulation from stock market volatility and commercial real estate trends.
• Tax Benefits: Rental property owners can deduct expenses such as mortgage interest, property taxes, and maintenance costs, which helps lower their overall tax liability.

Final Tips for Investing in Single-Family Rentals

Single-family rentals can offer a practical path to start investing in real estate with less than $100,000. If you identify target neighborhoods with strong rental and appreciation potential, you could purchase multiple single-family properties and create several revenue streams.

Success in single-family rentals comes down to understanding market values and rental demand and purchasing a property at or under market value. With dedicated research and networking, you can build the skills to purchase and rent a single-family home while creating positive cash flow from the first month.

Learn more about how to buy your first rental property and how to manage rental properties. Consider diversifying with investments, such as real estate crowdfunding or real estate investment trusts (REITs).

Frequently Asked Questions