One of the most well-known property types, single-family homes are typically what the average investor thinks of in terms of accessible rental real estate. And for good reason: From 2010 to 2020, single-family rents grew by an average of 3.5% per year.
Their popularity and steady demand from renters, along with the potential for rental income and appreciation, make single-family homes a common choice for long-term real estate investors. If you're looking to diversify your real estate portfolio, here's why single-family homes may be worth considering as part of your investment strategy.
What is a single-family rental property?
A single-family rental property, or SFR, is a rental property designed for one family to live in. This is typically a house or a townhouse. Single-family rentals are often found in suburban neighborhoods and are detached structures. They’ll frequently have a yard and a garage. In contrast, some other types of rental properties include:
- Multi-family homes: These are properties that have multiple families living under one roof. For example, duplexes, triplexes, and apartment buildings are considered multi-family housing because the property can house several families.
- Commercial properties: These include retail and industrial properties, such as warehouses, shops in mall complexes, and even data centers. Commercial real estate properties often have long-term leases, but with businesses, not individuals or families. Many of these are only available to institutional investors.
Historical investing returns on single-family homes
According to a 2020 report from Harvard University's Joint Center for Housing Studies, renting has become more common among age groups and family types that were once more likely to own a home. This shift stems from a combination of factors: rising home prices, higher lending rates, and a cultural preference for flexibility and freedom over putting down roots. This cultural change is more likely to be seen in the millennial generation. Accounting for roughly half of US households with children, these families are more likely to rent than own a home, Pew Center research shows.
This higher demand for single-family homes may explain why, during the last 15 years, despite a recession, single-family rentals have continued to deliver an excellent return on investment through both appreciation and rental income. Since 2010, single-family rents have consistently increased by about 3.5% annually, and in Q3 2021 posted the fastest year-over-year increase in the last 16 years.
Why invest in single-family homes?
If you’re considering real estate investing, single-family homes are worth considering. While managing single-family houses requires maintenance, upkeep, and repairs, they are typically the easiest types of properties to manage. Leases tend to be long-term, and tenants are families who aren’t looking for a short-term residence. This means single-family rental homes tend to offer more consistent, reliable growth, with lower overall expenses for marketing, tenant background checks, and contract legal fees. Here are some aspects of single-family investments to consider and why they may be a good investment choice.
Undersupply of single-family homes
The United States housing supply is severely under-built, and Freddie Mac estimates that the American housing market is undersupplied by 3.3 million units. This shortage is growing by about 300,000 units a year, and not enough homes are being built to meet demand.
And yet the demand, especially for single-family rentals, has been incredibly strong, and it’s only growing. The US Census estimated that the number of single-family rentals in the US grew by 31% in the 10 years after the 2007 housing crisis.
Despite this, we’ve built fewer homes than at almost any time in US history. The factors are many. Labor and materials costs have doubled since the peak of the mid-2000s housing boom, and the National Association of Home Builders estimates that regulatory costs increased the cost of a new home by 30% from 2011 to 2016.
Limited supply and ongoing demand for single-family rentals are two reasons many investors are drawn to them. Strong renter demand can help support occupancy and rental income, while limited housing inventory can support home values over time. Single-family homes also tend to appeal to a wide pool of potential buyers, including both investors and owner-occupants, which may make them easier to sell than some other types of investment property.
Low volatility
Historically, real estate in general, and single-family rentals in particular, have shown less price volatility than the stock market. One study compared single-family rental returns with S&P 500 returns and 10-year Treasury returns from 1992 to 2017. Over that 25-year period, the researchers found that single-family rental returns were comparable to stock returns, higher than bond returns, and less volatile than stocks.
According to the study, the S&P 500's best year during this period produced returns above 35%, while its worst year saw a similar decline. By comparison, single-family rentals returned 17.5% in their best year and declined 2.5% in their worst year. The stock market had six down years during the period, compared with two for single-family rentals.
Real estate is also often viewed as a potential hedge against inflation. Over the long term, the median sales price of U.S. homes has generally risen alongside inflation, though home prices can and do decline, as they did during the 2008 housing crisis.
Multiple ways to profit
Part of what draws many investors to single-family homes is the leverage that financing can provide. With a down payment, often 20% to 25% for an investment property, and a mortgage for the rest, investors can buy a residential property and rent it out, potentially generating rental income soon after a resident moves in.
Depending on local rents and demand, rental income may cover much of the monthly mortgage payment. In this way, a relatively small upfront investment can give investors exposure to the full value of a property. Keep in mind that leverage works in both directions. It can amplify gains, but it can also amplify losses if rents fall, the property sits vacant, or home values decline. Investors also need to budget for closing costs, repairs, insurance, and property taxes in addition to the down payment.
Over time, rental income can help pay down the mortgage, and if home values rise, investors may also benefit from appreciation. Rental property owners may also be eligible for certain tax benefits, such as deductions for depreciation and some operating expenses, depending on their individual situation.
With residential rental properties, it's also possible to increase a property's value, and potentially its rent, through upgrades and renovations. Investors and homeowners often use this strategy to add value, though renovation costs and results can vary, and improvements don't always pay for themselves.
Strong demand and appreciation
According to John Burns Real Estate Consulting, citing a Freddie Mac renter survey, 45% of renters want to move into a single-family home for their next rental. Space is one of the main reasons. The same analysis found that more than 65% of single-family rental homes have at least three bedrooms, compared with about 11% of apartments. (Side note: Many of the homes available on Arrived have three or more bedrooms.) This demand for more space is one reason many investors view single-family rentals as an attractive segment of the rental market.
Also keep in mind that single-family homes tend to have lower tenant turnover, which means that tenants are typically on a one- or two-year lease. This can save you money in expensive marketing and legal costs for finding, verifying, and bringing in new tenants frequently—not to mention the time spent. It also limits the number of weeks or months your property might sit vacant while you find new tenants and lose out on rental income in the meantime. The average single-family residential tenant tends to stay in a property for three years, which is double the average apartment tenure. Families often stay in these homes for five to six years or more.
More accessible financing
One reason single-family homes can be easier to buy than some other investment properties, such as larger multifamily buildings, is access to financing. With a down payment and a mortgage, investors can buy an entire property and gain exposure to its full value, and rental income may help cover part of the monthly mortgage payment. This use of borrowed money, known as leverage, can increase potential returns, but it can also magnify losses if rents fall, the property sits vacant, or its value declines.
Single-family homes are also financed differently from larger multifamily properties. Lenders generally treat apartment buildings with five or more units as commercial properties and underwrite them largely on their cash flow, meaning the income the property generates and its financial performance. Single-family rentals, by contrast, can often be financed with residential mortgages, where lenders focus more on the borrower's own income, credit, and assets, even for a non-owner-occupied loan.
Down payments can also be lower. Conventional loans for single-family investment properties typically require 15% to 25% down, depending on the lender and the borrower's profile, while commercial property loans often require 25% to 30% or more.
Flexible investing
Buying a property outright isn't the only way to invest in single-family homes. With platforms like Arrived, investors can buy shares of rental homes in multiple markets across the country without handling the day-to-day work of maintaining or managing the property.
Fractional ownership in real estate lets you invest in a portion of a property. The property is divided into shares, which are made available to multiple investors. Each investor shares in the property's costs and potential rental income in proportion to their stake.
Fractional investors may also benefit if the property appreciates in value, though home values can rise or fall depending on the market. Fractional properties are usually managed by professional property management companies, and their fees are typically paid from the property's revenue.
When it comes to single-family rental properties, fractional investing lets investors spread their money across properties in different cities and neighborhoods, including homes that might be out of reach for a single investor to buy alone. At Arrived, each property is held in its own Series LLC, and investors buy shares of that LLC. Arrived's offerings are taxed as REITs (real estate investment trusts), which carry certain tax considerations for investors. Investors should consult a tax professional about their individual situation.
Investing in single-family homes vs. multifamily properties
In residential real estate investing, many investors weigh single-family homes against multifamily properties. For financing purposes, multifamily properties generally have five or more units and can range from a few dozen to hundreds. Multifamily properties can make it easier to scale quickly, but single-family homes offer some potential advantages of their own:
- More accessible financing: As mentioned above, lenders evaluate multifamily properties differently from single-family homes. For a multifamily property, lenders look at the borrower and the property itself, including its income potential, market value, and whether that income can cover the debt payments. Single-family rentals can often be financed with residential mortgages that focus more on the borrower's income and credit.
- Longer resident stays: Single-family rentals often see lower resident turnover than apartments, since residents in single-family homes tend to stay longer. Less turnover can help reduce vacancy and the costs of finding new residents, though occupancy and expenses vary by market and property.
- A broader pool of buyers: Single-family homes can appeal to both investors and people buying a home to live in. That wider pool of potential buyers may make them easier to sell than larger multifamily or commercial properties, though sale timing and price depend on market conditions.
Investing in rental homes with Arrived
For these reasons, many investors see single-family homes as an accessible entry point to real estate investing, with a lower cost of entry than many commercial properties and easier financing. Steady renter demand and longer resident stays can also help support rental income over time, though returns aren't guaranteed and every property carries risk.
At Arrived, our mission is to make it easier for investors to access the potential for rental income and appreciation without the work of finding, buying, and managing a property themselves. Through fractional real estate investing, you can buy shares of individual rental and vacation homes in markets across the country, or get broader exposure through Arrived's funds. Browse the investments available on Arrived to get started or to add to your portfolio.
The opinions expressed in this article are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product. The views reflected in the commentary are subject to change at any time without notice.
