Real estate investing offers a mind-blowing number of viable options for building wealth and creating cash flow. It can offer quick cash or passive income, depending on your goals. You can invest in mortgage notes, a single-family home, multifamily real estate, commercial property, and so much more.
If you're looking to build a passive income real estate portfolio for the long-term cash flow, there's a good chance single-family rental (SFR) real estate has crossed your radar. Investing in single-family rental property can be a wonderful way for both individual real estate investors and institutional investors to build a substantial portfolio of income-generating properties.
But there are scenarios in which this may not be the best fit for every investor. Read on to determine whether SFR real estate is right for you.
What is SFR real estate?
SFR real estate, also known as single-family rental properties, is a form of real estate investing in which an investor holds an SFR property as a long-term asset in their rental portfolio. It can be a single-family home, townhouse, or condo.
The property is rented to a tenant with the difference in rental income to monthly expenses pocketed by the SFR investor. It can be a small income stream if a large mortgage is held or a more significant one if there are minimal expenses associated with the investment property.
The SFR property can be managed by the owner to increase returns or by a property management company for a more hands-off, passive income stream. Eventually, the property may be sold -- if, for example, home prices appreciate significantly -- but it is held at least initially for the primary goal of generating rental income.
Strategies for investing in single-family real estate
The SFR market can be a frustrating asset class for investors to pursue because they are in competition not just with other investors but also with retail buyers who are usually willing to pay market prices, sometimes higher. With that being said, there are a number of ways to find an SFR investment in today's market and still get a good deal.
It's certainly an option to buy a property at retail price to rent out, but it's typically going to have much higher cash flow when alternative avenues are taken. You can make offers on short sales or foreclosure homes, look for distressed properties both on and off the multiple listing service (MLS), or hold mortgages that, if defaulted on, can be turned into SFR properties.
The overall plan in most cases for SFR investors is to rent the home to a tenant in the short term so that the renter will pay down any mortgage held on the property. Then, the property is sold at a later date when home prices have appreciated, the mortgage is paid off, or the investor wants to pull out equity for personal use or to purchase a larger property like a multifamily home.
Is single-family real estate right for you?
Creating an SFR portfolio can be a lucrative real estate investment, but it may not be a good fit for all investors. How you choose to purchase and manage the property could not only affect your bottom line but also make a difference in the amount of time you have to put into it. Dealing with renters is not everyone's cup of tea, and if there's not enough room between rental income and operating expenses, you might not be able to hire a rental management company.
You will also have the inevitable holding costs associated with a vacancy. With a multifamily rental, you will at least have a portion of the income stream undisturbed while finding new tenants. But with SFRs, you will have nothing coming in until the property is occupied again.
You'll also want to figure financing costs into the investment unless you have a large pool of capital. If you do need a mortgage to buy an SFR investment, it's important to understand that the mortgage will account for the majority of the potential profit. However, as the mortgage gets paid down, you'll build equity in the property at "no cost to you," but it may only initially provide little if any passive income.
If you have only a small amount of capital to start out or are unable to hold an additional mortgage, something like a real estate investment trust (REIT) can grant you access to the real estate world, without the cost or burden of purchasing the investment yourself. Holding a single-family property as a rental is a well-known and achievable form of real estate investing for just about anybody.
If you're interested in starting to build your portfolio, speak with a real estate professional to maximize your returns for both short- and long-term profits.