Five Reasons to Consider Investing in Single-Family Homes
High interest rates and low housing supply have bolstered demand for single-family rental (SFR) communities as Millennials and Generation Z seek affordability in starter homes. Today, SFRs represent more than half of the U.S. rental market, and economists project that share will grow in the years ahead. With low operating costs, steady supplemental income, and long-term growth potential, investing in single-family homes offers considerable upside in a recessionary environment.
1. SFRs Are Less Volatile Than Stocks
During periods of stock market instability, SFRs have demonstrated their resilience. For example, SFR construction starts hit record levels in 2022 as other housing market sectors saw declines. Single-family rental properties have historically generated returns mirroring stocks, and with less volatility, according to Roofstock’s internal study based on data from the U.S. Census Bureau, S&P 500 return data, and 10-year Treasury returns between 1992 and 2017.
Roofstock found that between 1992 and 2017, S&P 500 stocks posted average annual returns of more than 35% in some years but fell by the same percentage or more during their worst years. SFRs produced reliable returns of 17.5% in their best year while declining by only 2.5% in their worst year.
2. A Smart Hedge Against Inflation
Although U.S. inflation surpassed 9% in June 2022, Arbor’s Single-Family Investment Trends Report Q4 2022 found that cap rates in the SFR sector were up 5.6%, demonstrating how this investment class typically performs well during inflationary periods.
Local economic conditions have a more significant influence on single-family home values than national trends do, and inflation impacts regions of the U.S. differently. While rents typically rise with inflation, rental demand has historically increased when mortgage rates rise. As a result, economic downturns can provide economic opportunities for SFR investors.
3. Generates Supplemental Income Streams
Investing in single-family homes is a smart strategy for meeting long-term financial goals, as this property type tends to appreciate over time. Rental agreements typically require tenants to reasonably maintain their homes, such as to mow the lawn, which generally keeps operating and repair costs down. Lower costs, coupled with national trends in rent growth, enable owners to maintain high cash flows.
Compared with multifamily properties, SFRs have low tenant turnover on average. As noted in Arbor’s report, U.S. Census Bureau data for Q4 2022 found SFR occupancy rates averaged 94.6%, up 40 bps from the previous quarter, further signaling the health of this sector.
Net operating income determines the value of multifamily properties, but with single-family homes, real market value determines property value. Unlike stocks, home prices are not prone to sudden and extreme fluctuations. That is why markets with strong population growth and rental demand ensure investors have stable monthly income for many years.
4. Single-Family Portfolios Can Be Managed Remotely
SFR communities typically do not need an on-site manager, while multifamily properties usually necessitate on-site managers due to the larger volume of units. With technology companies making it easier to own and manage remote assets, investors do not have to become involved in SFRs’ day-to-day maintenance and management.
About 72% of the more than 1,000 respondents to a 2022 survey from real estate technology company Mynd said they were considering buying an investment property in a city or state other than where they lived. Investing in single-family homes allows owners to diversify their portfolios across multiple markets to take advantage of available tax benefits and local economic trends.
5. Ability to Grow Portfolio Over Time
Single-family homes are typically cheaper than multifamily properties, making it easier to start investing with a lower level of capital. Investors can then use available capital from one property to invest in more properties, creating a snowball effect that enables their portfolios to grow over time. It is also relatively easier to sell single-family homes because there is a larger pool of potential buyers today.
Interested in Investing in Single-Family Homes? Contact Arbor Today
Flexibility and personalization define Arbor’s approach to growing financial partnerships. Our experience in single-family rental portfolio financing and our local market expertise have made a true difference for our clients for decades. With expert in-house servicing for the life of the loan across our Fixed-Rate Term, Bridge, Build-to-Rent, Lines of Credit, and other loan products, we can build a customized solution that is best for you.
Contact us today to learn how Arbor can help you get started with investing in single-family homes.
Interested in the multifamily real estate investment market? Contact Arbor today to learn about our array of multifamily and single-family rental financing options and view our other market research and multifamily posts in our research section.