Investing in single family residential (SFR) properties as rental income properties is becoming an increasingly popular real estate investment strategy, especially after the 2008 financial crisis. Compared to other types of properties like multifamily or commercial, SFR investment properties have some unique advantages and risks. This article will analyze the pros and cons of SFR as an investment property type from aspects of cash flow, appreciation, management, financing etc., and provide suggestions for investors interested in getting into the SFR rental property market.
Strong and stable cash flow is the biggest advantage of SFR investment property
The most important benefit of SFR properties over other property types is the strong and stable cash flow in the form of rental income. The demand for rented single family homes has been on a continuous uptrend, driven by factors like declining homeownership rates, tight mortgage lending conditions, and preference of renters. So SFR investors can expect consistently high occupancy rates and growing rental rates. Especially in the current rising interest rate environment, more people are turning to rented homes.
Leveraging is easier for financing SFR properties
SFR properties are easier to finance at higher leverage ratios through mortgages compared to small multifamily properties of 2-4 units. Investors can expect to finance up to 80% of an SFR property value. This allows investors to get better returns on their capital.
Appreciation potential makes SFR suitable for buy-and-hold strategy
In the long run, single family properties have demonstrated relatively stable and consistent appreciation trend. Though the appreciation rates are not as high as multifamily properties typically, moderate 3-5% annual appreciation can lead to considerable profit through long term buy-and-hold investment strategy.
Challenges exist in management and scaling for SFR investors
The small unit size also means less efficient management compared to bigger multifamily properties. Investors need to either self-manage or hire professional property managers to take care of leasing, maintenance etc. Also, as portfolios scale in size, operating challenges increase exponentially due to the distributed nature of properties.
In summary, SFR investment properties provide investors stable cash flow, leverage benefits in financing, and long term appreciation. However, small unit size also introduces inefficiencies and difficulties in management/scaling. Investors should evaluate based on individual risk appetite, capabilities, and portfolio balance.