Read on to find out more about single-family rental homes and why they could be a good investment.
It used to be that rental houses were rented out by owners as secondary income but in 1999, a 1031 exchange law was introduced that allowed an investor to purchase a property, fix it up and then let it sit as an investment for a period of time.
This way the investor could get a larger amount of return than they stood to make while selling because as the property was rented out and the rents increased, so did the value of the property.
Since its inception, many investors have enjoyed great success with this method and have built very successful passive-income portfolios with it.
In this guide:
Before getting into the details of what causes single-family rentals to be good investments during COVID-19, it is important to know that there are two key factors that should always be considered: location and quality.
With the hype of short-term flipping, it is easy to see how many investors may acquire a property, fix it up, and try to flip it for as much money as possible, right?
However, this should never be the case.
Houses can’t be flipped overnight. This also means that a house needs to be checked for local trends and ordinances before making an offer on it.
A professional and experienced investor always knows the right price to pay and the right time to sell.
It is unlikely that a single-family rental property will increase in value significantly in a very short period of time. However, it is possible to make some profits.
So, if you’re looking to buy a rental property to make money quickly, then you’re probably going to be disappointed with the results.
Surveys Show: Renters Pay Their Rent
Nowadays there are many folks that choose not to buy a home. Many are forced into this situation, but some choose a single living situation because of the added freedom.
There are many myths about this living situation. The biggest myth is that renters are broke and pay their rent late. In the US alone, there are about 44 million renters.
Surveys show that 75% of renters pay their rent on time every month. So are single-family rental homes a good investment during COVID-19?
Renters know exactly what they are paying for and are not often financially irresponsible. They most likely pay their bills on time, which is a very desirable trait of any tenant.
They’re also not as tied down as the owner of the house. If they want to move, they can just find another single-family rental home. This is a definite advantage if you’re planning on moving soon.
If you’re planning on renting out your home before you move, there are a few things to consider.
Are single-family rental homes a good investment during COVID-19? You may ask if the renter will take care of your home.
What Is a Single-Family Home?
Single-family homes are by far the most popular type of housing in the U.S. They are homes that are typically owned by one person who lives in the house and rents out the other rooms. It can also be owned by a couple, family, corporation, or other group of people who live in the home together. If you are doing a purchase for income and personal use, you can include your own residence in this category but only up to two out of the five units.
Reasons for Increased “Tenant Stickiness”
With rising home values and reduced inventory, the homebuying market is extremely competitive. Many prospective buyers are currently renting “ not very happy about it, but accepting of their situation “ and biding their time, waiting for their next move. It’s not just homeownership that those renters are waiting for “ it’s also for the next move in their career.
Also, with the widespread availability of leading the social platforms, a larger majority of consumers are discovering new possibilities around their homes, entertaining themselves with the thriving and growing technology industry. They’re starting to make career-related moves too, “ by leveraging the network that social networking has provided them.
For many of them, the next time that they move will be their first.
Single-Family vs. Multi-Family Property
Whether to buy single-family or multi-family paos may be the most frequently asked question facing retirement-age investors today. The answer will depend on your financial situation, your tax bracket, your planned role within the company and on your age.
To assist retirees who face this dilemma, we’ve compiled a list of vital considerations based on a recent study by Coldwell Banker. As a multi-family owner, you know that the investment advantages can be significant. For example, your cash flow will be virtually continuous as long as the units you own stay occupied. Also, most multi-family owners find that they can finance the acquisition of additional units and the periodic capital improvements within their equity.
Considerations for Single-Family Investment
Similar to multi-family, single-family properties offer a number of advantages, including:
Strong cap rates. Single-family landlords know single-family cap rates will tend to be higher than for multi-family properties. Cap rate is the ratio of a rental unit’s income to its price. Cap rates are usually higher for single-family investment because single-family properties are generally better located. These properties are located on well-maintained streets, in up-scale neighborhoods. There are few, if any, competing buildings within view. That means fewer tenants will pull out their wallets and drive by in search of another apartment, home or condo.
Pros & Cons of Single-Family Home Rentals Over Condos, Townhomes, and Duplexes
More and more it seems there are plenty of reasons to be excited about renting single-family houses. Investors and millennials alike are getting back into the single-family rental business. Here are just a few reasons why renting a single-family home may be worth your attention.
The Buyers Are Back: Evidenced by the current rental market, there were never that many buyers—most were investors. This is a good thing because investors can spot and seize investment opportunities that the average buyer would certainly miss. Investors can see the potential of single-family rentals in neighborhoods that people on the outside can’t grasp. Investors see that what others see as run-down and ravaged by the economy is a hidden gem in the making.
Those Potential Income Streams: Income streams like rental can boost your investment portfolio. If you find the right house, it puts money in your pocket every month. Renting out single-family homes is also a good option for investors looking to save space in their own home. By splitting their time between a rented house and their own, they’re able to limit the amount of work on their personal home should they have other options.
The housing market has been hot for a while now and many people have started looking for single-family rental homes as a great investment vehicle. While the prospects look good and the potential return on investment is great, are single-family rentals truly a good bet?
Why Invest in Single Family Homes?
Historically, single-family does have a good track record, and there are many people who have made good money off the rental investment. The market for single-family has been significantly heating up, fueled by speculators and others who see the potential as an investment. These people generally fall into one of the following groups:
Folks who have a full-time job and look for additional income. This group typically considers single-family rentals as a passive investment with relatively low maintenance costs. They look to get a fairly good return on investment with relatively low risk.
Folks who have large sums of money and people who have historically had good returns in the past, such as retirees. In addition to generating money, they also look for additional income streams. This group typically considers passive income as a shot in the arm for their current income. They too are looking for decent returns with very low risk.
If you’ve decided to purchase a home and build your own home, it’s a great idea to consult an insurance advisor about obtaining home insurance. Home insurance is a great way to ensure your home stays protected as you add value – but it’s important to make sure you’re finding the right coverage.
You may have an idea of what you want in home coverage, but regardless of when you expect to sell, it’s always a good idea to consult a professional to get the best value on your home insurance.
Single-Family Homes Could Be a Good Addition to Your Portfolio
You can still make money on single-family rentals during COVID-19. Just be smart about where you invest.
The real estate market has not been kind to Wall Street over the last few years, especially when it comes to single-family rentals.
Home prices began to slide almost immediately after 2007, and today the process of purchasing these often-expensive houses was extremely challenging, but it still can be a profitable investment if you know what you are doing.
One important step is knowing where to look.
Framing zones where the value of homes fell the most during the housing crisis. If you are considering buying a single-family rental in one of these areas, look carefully at the local market and decide whether the price is right.
Make sure the neighborhood has positive indicators that will help drive up the value in the future. These could include close proximity to everything from schools to major businesses to express tunnels. Your rental house could be a great investment.
The decision to purchase a single-family rental is all about risk and return. What you pay for a house, combined with the income you get from that house, should give you a decent chance of making money while minimizing your level of risk.
Fannie Mae’s latest release, Portfolio Strategy for Helping Creditworthy Consumers Afford to Buy a Home, released in April of this year, was an excellent analysis that still applies today.