Investing in single-family rentals is one of the oldest real estate investment strategies and a staple of wealth building for investors of all experience levels. There are many differences between single-family and multi-family investing and a long list of pros and cons for each. Today we’re discussing the pros and cons of single-family investing to help investors understand if this strategy is in alignment with their financial goals.
First, let’s take a look at the pros of single-family investing.
One of the major benefits of single-family rental investing is that it’s a relatively simple business model. When you own a rental property, you are responsible for finding and screening tenants, maintaining the property, and collecting rent. While these tasks can be time-consuming, they are generally not as complex or expensive as managing a multi-family property. When it comes to things like arranging move-ins, coordinating capital expenditures and managing the financial reports, SFRs can be less complicated than larger multi-family projects.
Another pro of single-family rental investing is that it can provide a steadier cash flow than other types of real estate investments. There is a larger demographic of potential tenants in the SFR space than there are searching for multi-family units, so you’re likely to have fewer per-unit vacancies and longer lease terms.
One of the most compelling factors of the SFR strategy is the amount of steady deal flow that’s available at any given time. Simply put, there are fewer multi-family projects out there than there are single-family homes and so there is a greater chance of finding quality deals. That certainly doesn’t mean every deal is going to be a winner, though you’re likely to have more options for cashing flowing properties in the SFR space.
While there are many advantages to single-family rental investing, there are also some drawbacks to consider. One disadvantage is that rental properties can be more difficult to finance than other types of real estate investments. Lenders often view rental properties as riskier investments and may
Lack of Diversification
When you invest in a single-family rental property, your eggs are all in one basket. If something goes wrong with the property or the tenant, you could be facing a significant loss. In contrast, when you diversify your portfolio with multiple properties, you can offset any losses from one property with the positive cash flow from another.
Management and Maintenance
Another drawback of rental properties is that they require time and effort to manage effectively. You’ll need to find good tenants, handle maintenance and repair issues, and keep up with the financial reports. This can be time-consuming and expensive if you don’t have a good system in place.
Building a single-family portfolio takes time and patience. While multi-family deals can grow your door count exponentially, an SFR portfolio is built one door at a time. This is an important trade-off to understand. While single-family homes may be less complicated to manage on an individual basis, building a substantial portfolio can become a complex endeavor over time.
Less Cash Flow Per Door
Finally, it’s important to understand that you’ll generally earn less cash flow per rental unit with an SFR than you would with a multi-family property. That’s because there are more rental units in a multi-family property, which means you can spread the fixed costs (like mortgage payments and insurance) over a larger number of rental units.
Whether you’re looking to build a large portfolio or simply build some passive wealth, single-family rentals can provide massive investment potential. While there are positives a drawbacks to this strategy, it’s important to start your investment journey somewhere and SFR’s provide the perfect entry strategy.
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