Understanding the Growing Single-Family-For-Rent Market

The single-family rental market is growing. Many real estate investors think this could be ideal because rental rates continue to rise nationwide. The Burns Single-Family Rent Index for May 2024 shows that the rent for a new lease increased 3.9% year-over-year. The historical average is 3.6%. The rental rate increased even more in highly desirable areas like seller's markets.

Here’s what you need to know about single-family rentals (SFRs) to help you determine if owning rental homes as part of your investment strategy makes sense.

What Are Single-Family Rentals?

SFRs are residential properties designed to accommodate a single family. They are usually stand-alone houses that do not share a common wall with another home (as with duplexes or multifamily units). They are generally large, 2,500 square feet or greater. They may also have access to outdoor spaces like a garden or a backyard.

There is a difference between SFRs and short-term rentals. Short-term or vacation rentals usually last for less than a year and might be for only a few nights. An SFR usually has a lease of one year or longer.

A Brief History of Single-Family Rentals

SFRs became prominent due to changes in housing markets, economic trends, and lifestyle.

After World War II ended, government policies like the GI Bill and the expansion of interstate highways fertilized the ground for the explosive growth of the suburbs.

The American dream became owning a home on a decent-sized lot surrounded by a white picket fence. A young married couple with two kids and some pets who lived in their home made the dream complete.

On the other hand, renting a single-family home was not popular. Renters filled up apartment complexes instead. Then came the Great Recession and housing crisis of 2008-2009. Millions lost their homes to foreclosure and institutional investors with lots of money to invest scooped up these bargain properties for pennies on the dollar. They converted them to rental units to meet the demand of people losing their homes who needed a place to rent.

Today, SFRs have become popular. They offer tenants the benefits of a suburban lifestyle without the challenging commitment of a mortgage.

Why Demand for SFRs is High

Many factors influence the demand for SFR, including affordability, work-from-home trends, lifestyle factors, and flexibility to move as necessary.

Affordability

Homeownership is becoming too expensive. One of the main drivers of this SFR growth is the lack of affordability for those wanting to buy a home. Although SFR rental rates may be about the same as a monthly mortgage payment, renting a house requires a much smaller deposit than the typical down payment on a home purchase. Furthermore, renters don't have to worry about maintenance costs; these are the landlord's responsibility.

Work-From-Home

The pandemic greatly changed the working environment. Work-from-home has become popular, and while back-to-office mandates are in place, many are on a hybrid work schedule. More space has been needed for a home office, with SFRs filling that need.

Flexibility

Changing lifestyles—including the need to pick up and move without being burdened with the details of selling a house—have also driven SFR demand. Younger adults who are ready to start families like the space that a home rental provides while valuing the flexibility of making a location change if needed.

Benefits of SFR Ownership

With the demand for single-family rentals increasing, many investors are finding that owning these properties can offer multiple benefits, including the following.

Tax Advantages

If you are investing in SFRs, it is a good idea to work with a qualified tax professional to maximize your deductions, such as mortgage payment interest, depreciation, property taxes, and operating expenses.

Portfolio Diversification

Owning rental property as part of your investments is considered by many to be an excellent way to diversify your investment portfolio. Because real estate is generally not correlated with market movements, SFR ownership can help balance the value of your holdings.

Steady Rental Income

You can benefit from steady rental income if you have good tenants who pay the rent on time. This income helps pay for the property while also building your net worth. 

Positive Cash Flow

In some cases, owning rental properties can generate a positive cash flow after paying all expenses. Suppose you net a few dollars of monthly profits from rental ownership after paying costs. At first, a few dollars of profits from one rental property may not seem like much. However, if you build your rental real estate portfolio with cash-positive rental homes and then multiply the positive cash flow by ten or a hundred homes, the amount may be significant. Many multimillionaires in real estate have built their wealth using this method.

Challenges of SFR ownership

While there are advantages to owning single-family rentals, it also pays to be aware of some of the challenges you'd face as a landlord. Some of these include:

Finding the Right Tenants

The most challenging issues when owning rental homes are the tenants. A lousy tenant may stop paying rent and become highly destructive to the property. Evicting a bad tenant is both costly and frustrating. To mitigate the risk of a poor tenant, take the time to perform due diligence and check references.

Also, you cannot discriminate against any legally protected group. Still, you can market your property to attract the type of renter you desire, such as renting to a military family. To avoid headaches, consider hiring a management company to manage the property, tenant relations, and problems.

Ongoing Maintenance and Repairs

One of the reasons why people like to rent a home is they are not responsible for maintenance and repairs. The landlord has to take care of those things. And that means you, if you are the owner. You're responsible for covering the costs of repairs and replacement of equipment, as well as general property upkeep.

You may have an advantage if you are a do-it-yourself (DIY) handyperson type and like doing the maintenance and repair work. If you are not skilled in this area, be aware that this may be your downfall if you do not budget appropriately for these expenses. Consider getting a home warranty insurance plan to help cover the costs if possible.

Market Fluctuations

General economic conditions and market fluctuations could impact demand for SFRs and rental rates. The property values can also ebb and flow, depending on the market. Furthermore, if you are a modest investor with a few rental properties, you could find yourself competing with the enormous resources of institutional investors with access to more capital at lower costs than you can find.

When seeking to buy an investment property, be sure to get access to the best data resources, such as PropertyReach, that will help even the playing field. 

Finding the Right SFR

There's more than just buying a single-family rental. You also need to examine these other factors when making up your mind to acquire such a property.

Location

Naturally, you want your rental property to be in a location that attracts quality tenants. For example, you might consider searching for potential rental homes to buy in quality suburbs near a military base. Many military families like to rent homes for their tour of duty, which can be two or three years.

If you plan to be a “hands-on” landlord, choose a convenient location to keep an eye on your rental properties. You may find it is easier to live near your rental homes, so you can drive by them regularly to see if anything seems out of control.

Market Dynamics

Rental rates are set by the market dynamics, including the vacancy rate.

In a seller’s market, there are more interested buyers than homes listed for sale. Properties may sell fast and for prices at or above the listing price. You might find it too expensive and not profitable enough to buy rental homes for investment.

In a buyer’s market, more homes are listed for sale than interested buyers. In this situation, you could find an attractive deal. Just be careful that there is not some underlying reason why more people are selling than buying. High vacancy rates may exist for good reasons.

Cash Flow

Hunt for a rental property to buy that will create positive cash flow after all bills are paid. This means paying attention to the market conditions, understanding the tenant base, and knowing what things cost regarding repairs and operations.

Financing

Due to the high competition for quality SFRs, your best bet is to get your financing lined up and approved with a binding commitment before making any offers. With the backing of financing in hand, you can make offers more likely to be accepted by the seller.

Start the Search for Rental Property

The growth of the single-family housing market provides two things: Homes for people who cannot afford to buy (or who don't want to) and possible investments that could generate cash flow and value. If you're interested in SFRs as an investment, be sure to perform in-depth due diligence and have professionals on your team to guide you.

Also, PropertyReach can be relied on as a resource for detailed information on SFRs and other properties. Advanced search capabilities allow you to filter an abundance of data according to your needs. Sign up for the free seven-day trial to g