How to Invest in Single-family Rental Homes
Real estate is a tried and true strategy for investors looking to build equity in physical assets. One way investors can generate cash flow while benefiting from appreciating property values is by renting out a property.
However, the traditional way of renting out property is notoriously difficult, especially for investors without a lot of capital. Thankfully, times have changed. Today, there are a number of fintech companies that allow investors to add single family rental homes to their portfolios with a small investment.
This article will dive into how to invest in single family rental properties and some things you’ll want to know before you get started.
The Short Version
- Single family homes are a popular investment option for real estate investors
- They are in high demand and provide cash flow as soon as they are rented out
- For investors on a budget, there are a number of platforms offering single family home investments without the burden of purchasing one or becoming a landlord
Why Investing in Single Family Homes Might Be a Good Idea
Single family homes are in high demand. According to data from Arbor Realty Trust, approximately 95% of single family homes are occupied, with vacant-to-occupied rent growth climbing to unprecedented heights since 2020. With such a high occupancy rate, these types of properties make a reliable starter investment for investors looking to dive into real estate.
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One of the draws of investing in single family homes is that they tend to generate cash flow immediately through rent. This can be used to pay down the mortgage of the property while also building equity in it. As part of a long-term real estate strategy, an investor could leverage the cash flow and equity of a single family home to purchase more rental homes or a larger multi-unit property.
Another reason to consider investing in a single family home is because of their low vacancy rates. From a management perspective, a single family home only requires maintaining one lease at a time rather than constantly searching for new tenants to fill independent apartment units.
Compared to larger properties, single family homes can be easier to finance. They also tend to be more affordable and require less upfront capital. This lowers the barriers of entry for less established investors.
How to Invest in Single Family Rental Homes
Before making the decision to invest, you’ll want to do some market research. Sites like Zillow or Trulia will let you see what properties are available for sale. You can check the home values in a given neighborhood to get a sense of how much properties are appreciating for and what your potential rental income might look like.
One way to identify a good investment opportunity is to use the 1% rule. This rule stipulates that the monthly rent you generate from your investment property should equal 1% of its purchase price. For example, if you buy a house for $100,000 you should aim to earn no less than $1,000 per month in rent.
After you’ve done some research to find a potential property you’ll want to get a better understanding of the laws and regulations governing the area. Some areas limit the number of days a property can be rented out on short-term rental sites like Airbnb. Other areas have laws that can make it difficult to evict a bad tenant. You’ll want to know how these types of laws might impact your investment and what you will need to know to mitigate any risks.
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When you’re ready to purchase a property you can go to your local bank and apply for a traditional mortgage. If you don’t have a ton of startup capital, however, there are other financing options to consider. Crowdfunding platforms like Fundrise can help cash-strapped investors get into real estate investing without taking on the burden of a mortgage — or of becoming a landlord.
Low-Barrier Investment Opportunities
While the traditional method works for a lot of people, buying a single family rental home outright requires a lot of time, money, research and ongoing work in maintaining the property and vetting tenants.
People interested in taking advantage of the lucrative single family rental home market without the down payment can look into these new real estate investment startups.
Roofstock is an online platform that gives investors the opportunity to invest in tenant-occupied single family homes. Investors can choose an individual property to purchase or select a portfolio of properties to invest in.
There are some fees with Roofstock but they are significantly lower than purchasing a property outright. Buyers pay a 0.5% marketplace fee while sellers pay a 3% listing fee. You can also work with a Roofstock-approved property manager in exchange for 10% of the monthly rental fee. This could be a good option if you’re interested in owning properties remotely or don’t want to manage them yourself.
Read our review of Roofstock here.
Mynd is an end-to-end real estate investing platform. It allows investors to buy, lease, manage, and sell properties all in one place. The platform is also a place for prospective tenants to find properties to rent.
If a tenant misses a payment, Mynd guarantees rental income of up to $5,000. This can help you maintain cash flow without disruption. Mynd operates in 26 different markets and fees can vary depending on the region or area where you’re looking to invest.
Arrived Homes is a real estate crowdfunding platform that allows people to invest in rental properties and vacation homes. Instead of purchasing a property on their own, investors buy shares of a property from Arrived’s portfolio of properties. Depending on what’s available, they can choose to invest in shares of one or several different properties. Investors can then receive a portion of the rental income generated by the property.
What sets Arrived Homes apart is the ability to invest in vacation properties. Often vacation properties can command a much higher rent than traditional single family home rentals. Investors can get started with as little as $100 and pay a 1% annual management fee.
Read our take >>> Arrived Homes Review 2022: We Tested It Out
Fundrise is another popular crowdfunding real estate investment platform. Investors can make investments in a variety of properties, just like with Arrived Homes. Fundrise invests in large private deals, like luxury apartment developments as well as commercial properties that would be out of reach for most new real estate investors.
You can get started on Fundrise with as little as $10 with their Starter portfolio. They also have three other portfolio tiers with different investment minimums and different mixes of REITs, funds and properties. Investors will be able to earn quarterly dividends and benefit from any property appreciation at the end of their investment term.
Doorvest is a real estate investment platform that tailors itself to an investor’s specific requirements. The matchmaking algorithm Doorvest uses to help investors find properties can be helpful for someone on a budget. It can also narrow the search process down, making it easier to get started.
One of the key benefits of using Doorvest is that they will monitor and coordinate the renovation work on your behalf to make sure rental properties are tenant-ready. This is useful if you invest in a property that needs a little bit of work before it’s ready to be rented out.
One of the downsides of Doorvest is its property management requirement. Investors will need to agree to use Doorvest to manage their property and source tenants for the first year, a service that comes with a 10% management fee. After the first year, investors can decide to keep working with Doorvest or find their own property manager.
Learn more >>> Doorvest Review: Hassle-Free Real Estate Income for a Fee
Lofty.ai is a fractional real estate investing platform. It’s based on the Algorand blockchain which allows investors to purchase tokenized shares of physical real estate assets.
Similar to investing in an Real Estate Investment Trust but with a crypto twist, investors purchase equity in an LLC that controls each investment property using Lofty tokens from their Lofty wallet. This gives investors an ownership stake in the property which allows them to vote on things like repairs.
Investors can earn rent on properties, which they can choose to be paid out daily, as well as any appreciation that is generated over the investment term. This is useful for crypto investors looking for ways to earn passive income while putting their coins to work.
Pros & Cons of Investing in Single-family Home
Single family homes tend to be a much safer investment than multi-unit properties. There is high demand for single family homes which means investors can be more selective about who they rent to. Properties also require less start-up capital which can make them much easier to finance too.
Single family homes are also a great investment to generate passive income. Whether you become a landlord or work with a property management company, you can collect rent payments with minimal active work.
Some real estate investment platforms offering single family homes prioritize underserved areas. While this isn’t inherently a bad thing, it can come with its own risks. These could include a constant churn of tenants, properties that sit vacant, or minimal appreciation in property values.
While single family homes tend to be easier to manage, you are dependent on your tenants to cover the mortgage of the property. Regardless of whether or not they pay their rent in full and on time you are still on the hook. Even though multi-family properties can be a little bit more challenging to maintain they help diversify this risk across multiple tenants.
Should You Consider Investing in Single Family Homes?
If you’re looking to add real estate to your investment portfolio, single family homes are a great place to get started. They tend to be more affordable, provide cash flow, and appreciate in value over time.
For investors on a budget, there are a number of investment platforms that allow you to capitalize on real estate investments without owning or managing your own property. These platforms allow you to purchase shares or ownership stakes in a property — just like a business — while collecting rent payments too.
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Thanks for pointing out that buying single family homes are good for their liquidity and not so much of passive cash flow. Maybe I should consider looking for a single family home real estate agent to explain to me what kind of single family homes might effectively appreciate in value in the future. I would like to make sure that once I decide to liquidate my investments, I will come out on top with a significant amount of profit.
I don’t think so because for now there’s a big possibility that tenants wont be able to pay but maintenance is something that most landlords still have to cover…if anything…