12 High-ROI Home Improvements
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If you are a beginner real estate investor, you may be examining real estate niches and trying to decide which one is right for you.
One of those options to be considered is Single Family SFR Real Estate (SFR).
In this article, we’ll explore SFR real estate to help you decide if it's the right real estate investing niche for you.
What is SFR Real Estate?
With SFR real estate, a real estate investor rents out a single-family residence as opposed to a unit in a multi-family building like a duplex or an apartment building.
A single-family residence is a one-unit detached property that usually includes a garage and a yard.
14 Reasons to Invest in SFR Real Estate
If you're wondering whether or not you should invest in SFR real estate, there are many reasons to do so. Next, we'll take a look at 15 of those reasons.
#1: Suitable for Beginners
Because SFR is a relatively simple investment — after securing a loan or paying for the property in cash, the only thing standing in between earning monthly cash flow is finding the right tenants — making it a good option for beginner real estate investors to dip their toes in the real estate investing pool.
Once you rent your property you will enjoy a steady cash flow from rental payments in addition to the potential for building equity with rising prices.
#2: Low Barrier For Entry
Because you can finance a single-family residence without a large capital investment — you can use traditional mortgages, private money loans or by leveraging your existing home equity — SFR real estate has a low barrier for entry compared to other forms of real estate investing.
#3: Appreciation
When your single-family home appreciates in value — it can appreciate much faster than other forms of real estate investing — you can build equity in addition to a steady rental income flow.
The longer you own the home, the more it will grow in value, and when you decide to sell it, you’ll be able to reap the benefits of that appreciation.
#4: Tax Benefits
Since SFR real estate is held for longer than 12 months, investors can receive more tax breaks than other fast-moving investment types, such as house flipping.
These tax benefits include depreciation, where you can take an annual tax deduction based on the average depreciation of the building.
You can learn how rental income is taxed — and how to pay less taxes legally — in this guide.
#5: Cash Flow
Once a property is rented to the right tenants, SFR property investments can provide rental payments that can cover your mortgage payment, general maintenance.
While other real estate investments have fees that can eat away at this cash flow, like ground maintenance, SFR real estate does not.
#6: Diversification
If you have your hard earned money invested in bonds, mutual funds, savings accounts, or other investment accounts, SFR real estate is another way that you can diversify your investment portfolio.
#7: High Market Demand
The demand for single-family rentals remains high today. Construction of single-family homes does not keep up with demand in some areas, so you can expect low vacancy rates and high rent potential.
#8: Easy Management
As long as a well-built and well-maintained property is purchased, SFR properties are easy to manage compared to multi-family properties. You can typically manage the property and avoid the fees associated with hiring a property manager.
#9: Safe Principal
Real estate is considered a safe investment because of supply and demand. After all, people will always need a roof over their head regardless of what the economy is like or how the stock market is doing.
Keep in mind that it’s critical to research the market trends of the area you’re considering buying a SFR real estate property.
#10 Inflation Hedge
Recently, inflation has been a popular news topic the past year, and interest rates have increased over the past few months.
SFR real estate is a hedge against both, as the purchase price and interest rate are locked down as soon as you close.
If you can get the owner to finance your next SFR real estate deal or do creative real estate investing like with Subject To properties, your interest rate may even be lower.
#11 Leverage More Real Estate
We mentioned appreciation and cash flow above as two of the many reasons to invest in SFR real estate.
As you build equity in your properties through appreciation and smart improvement spending, you can use that equity to buy other SFR real estate properties.
This is known as leverage.
You have many tools and resource options when real estate investing. By making wise investment decisions, you can quickly grow your portfolio.
#12 Long Term Tenants
Vacant properties cost you money, so give yourself the best chance to succeed.
You can do just that with SFR real estate because, on average, there is less tenant turnover in SFR real estate than in investing multi-family real estate.
#13 Easier to liquidate
SFR real estate can be liquidated more quickly than multi-family real estate, and there are several reasons for this.
SFR real estate doesn’t cost as much as multi-family real estate, and is easier to get financed.
Therefore, it’s easier to find a buyer and it might just be one of your current tenants.
SFR real estate closes more quickly than MFR, and that’s another reason it’s easier to liquidate.
#14: SFR is (Nearly) Passive Income
Rental properties require a bit of work, such as maintenance, as well as finding new tenants when someone moves.
Then there’s the occasional appliance or plumbing issue that needs addressing.
In SFR real estate, these few scenarios don’t happen that often, making SFR real estate almost passive income.
Advantages of SFR Real Estate
The main reason to invest in SFR properties is that they are profitable. Compared to other forms of real estate investing, SFR investing generally yields more monthly rental income per unit.
Tenants generally view the residence as a home and take good care of it, eliminating the need for time-consuming property management or hiring an outside company to do the job.
Disadvantages of SFR Real Estate
While SFR investments have many advantages for real estate investing, there are some disadvantages.
Keep in mind that when you buy SFR real estate, you buy them one at a time, so it can take you longer to scale your portfolio.
Also, if your SFR real estate properties are in different locations, for example in a state on the other side of the country, managing tenants, as well as any necessary repairs, can become an issue.
Plus, prolonged vacancies can have a far greater impact since there are no other units, for example, compared to commercial real estate investing, to compensate for the loss.
SFR Investment Strategies
SFR real estate investment strategies can range from buying and holding a single unit to BRRRR, where you buy a property, renovate it, rent it, refinance, and repeat the process.
Let’s take a look at a few SFR real estate investment strategies.
#1: Buy and Hold
This strategy involves buying undervalued properties and repairing them.
After the repairs, you rent them to tenants for a long term.
Serving as a landlord can be tedious, so some investors use management companies to manage their properties.
This makes the investment truly passive income.
#2: BRRRR
The BRRRR Method, an acronym for Buy, Rehab, Rent, Refinance, and Repeat) is similar to the buy and hold strategy.
The primary difference is refinancing, which is cash-out refinancing.
Real estate investors use the cash from refinancing to purchase additional properties and scale their real estate business.
#3: Fix and Flip
Fix and flip is an investment strategy made popular by cable TV where investors buy distressed properties priced below their value because of their condition, and they work quickly to rehab these properties and then sell them for a profit.
It's a profitable and popular way to invest in SFR real estate.
#4: Wholesaling
Wholesaling is a real estate strategy that is easy for most investors because it doesn’t require any up front money.
You find homeowners who want to sell and agree on a purchase price with them.
Next, you find real estate investors looking for properties to buy and coordinate a transaction between the buyer you found and your seller.
Once the seller and buyer have closed on the property, the real estate investor who purchased the property pays you a finder’s fee.
It is important to note that you cannot present yourself as a real estate broker or agent if you do not have a real estate license. This is why you are paid a finder’s fee instead of a commission.
You can read more about wholesaling in this guide.
SFR Real Estate Vs. Multifamily Investing
We’ve discussed SFR real estate at great length in this article, and you might be wondering how it compares to Multi family investing.
Multi-family residences have two or more separate living spaces, such as:
- duplexes
- triplexes
- quadplexes, or fourplexes
The additional tenant spaces may result in additional advantages, such as more rental income for investors.
However, it also means more drawbacks.
Multifamily investing costs more to purchase and rehab, and they can take longer to sell.
In addition, multifamily properties are not usually in the same quality of neighborhoods as SFR real estate properties.
These facts, and the benefits we’ve already discussed, are why SFR real estate properties are popular among investors.
The Bottom Line: SFR Real Estate
If you are a new real estate investor looking for a profitable, yet affordable real estate niche, take SFR real estate into consideration.
With SFR real estate, you can expect to keep your principal safe and reap the rewards of a steady income stream in addition to building equity with higher prices in the future if you buy in a good area.
Since SFR properties are valued by comparable residences in the neighborhood, make sure you know about local market trends before you invest.
Once you buy SFR real estate, attract a high-quality tenant who will take care of your property and you’ll be on your way to experiencing the benefits of this form of real estate investing.
