Single family rentals have recently been in high demand by both investors and homeowners. Single family homes, when compared to stock and bond investments, have created far more consistent returns over time. During the recession in 2008, single family homes continued to generate returns for investors through rental income from tenants, despite price depreciation. Since 2009, the amount of homeowners has declined largely. More tenants are looking to rent their spaces rather than purchase housing. There are many additional reasons why single family rentals are in high demand.
Defining Single Family Properties
Single family homes differ from many other types of real estate investment properties in that they are detached homes that are normally located in suburban neighborhoods. Families who live in single family homes tend to stay longer than families who rent spaces in multifamily properties (ie apartment buildings) due to the fact that single family homes present a sense of ownership to tenants.
Using Leverage to Purchase
Single family homes are great investments for investors that don’t have an immense amount of capital to start investing with. The low price of single family homes allows investors to purchase properties with a relatively small amount of equity capital, especially with the utilization of leverage. Leverage is simply the use of debt to help finance the purchase. Lenders will often lend up to 75% LTV (loan to value) of the purchase price, leaving only 25% to be funded from the purchaser in the form of cash (equity).
Real estate, while it carries its own share of risks like every other investment, offers more predictability than other asset classes. Stocks, while they can generate large returns, are far more unpredictable than real estate investments and are subject to daily swings in the stock market. This is known as volatility. However, volatility can also cause investors to lose a lot of money within short periods. Real estate is far less volatile than the stock market and generates consistent returns for investors who invest their money wisely. While single family home prices do appreciate/depreciate, historically real estate values appreciate s small amount a year and a far less subject to volatile changes. Additionally, investors are able to generate more predictable passive income through real estate investments. As a percentage of total returns, the cash flow (income) component is often a higher percentage of the overall return profile compared to stocks, contributing to increased stability in returns.