Home prices are skyrocketing while supply dwindles throughout the country. As a result, many Americans (especially first-time home buyers) are finding it extremely difficult to become homeowners. The median price for a single-family home in the U.S. grew 15.2% last year (from $331,500 to $382,000).
As fewer and fewer Americans can afford to buy a house, renting is becoming the new norm.
And that means single-family rentals are an increasingly relevant (and lucrative) investment. U.S. single-family rent growth increased 12.6% in January 2022. This is the fastest increase in over 16 years and the 10th consecutive month of record-level rent growth.
To say single-family rentals are experiencing strong demand in 2022 (and don’t seem to be slowing down anytime soon) is an understatement.
In this article, we’ll cover what a single-family rental property is, why they’re a great investment, the top factors driving strong demand in 2022, and how you can get started investing in SFRs today.
Single-family rentals are, in legal terms, single residential units. Only one person, couple, or family lives on the property. Multi-family rentals, on the other hand, include duplexes, triplexes, or apartment complexes.
Fourteen million U.S. households lived in single-family rentals in 2019. That’s over one-third (33 percent) of all renter households.
Many tenants prefer single-family rentals, leading to less turnover and longer lease terms. Some reasons why include:
Investing in single-family rentals is unique to other forms of investing. When you purchase real estate, you can use a relatively small amount of your own capital while borrowing the rest from a lender or bank. This is called “leverage”, and using it multiplies your buying power in the market.
The amount of your own money that you put down on the investment can be in the form of cash or “equity”, and the amount that you borrow is called “debt”. If you have significantly more debt than equity, the investment is considered “highly leveraged”.
Over time, if a rental property appreciates in value after purchasing it, an investor can expect higher gains than they would through leveraging a smaller amount, even with the same initial investment.
For example, let’s say you invest $10,000 of your own money and borrow $90,000 from a bank to purchase a $100,000 rental property.
Let’s assume that each year, for 5 years, your investment property will appreciate by 5%.
Year 0: $100,000
Year 1: $105,000
Year 2: $110,250
Year 5: $127,268
After 5 years, if rates of appreciation remained steady at 5%, your property value would have increased by over $27,000 dollars.
Because the entire $100,000 asset is calculated in the appreciation (with only a $10,000 investment of your own capital), it’s possible to see higher gains over time using leverage than through other forms of investing where your principal is lower.
Of course, this assumes that your rental property appreciates in value. While leverage multiplies your buying power, it also multiplies your risk. If an investor uses leverage to purchase a rental property and the value of the property decreases, their loss is much greater than it would’ve been if they have not leveraged the investment.
In general, the more highly leveraged investment is, the greater the risk (and the greater the potential benefit). So whether or not an investment is a sound greatly depends on whether you can expect the value of your investment to appreciate over time.
Over the past year, home values have gone up 20.9% according to Zillow. In 2022, experts agree that we will see overall home values continue to trend upward, but differ on exactly how much: estimates range between 2.9% and 16.4%.
Factors that contribute to real estate market growth include:
While overall home values are continuing to increase in 2022, the rate of appreciation on single-family homes is highly dependent on your location.
For example, the Urban Land Institute’s Emerging Trends in Real Estate report ranked Nashville as the top-ranked real estate market. According to the Financial Times, over the past five years, home values in Nashville have increased by nearly 81%.
Compare that to a city like Toledo, Ohio, where the median home price has fallen 18.7% since 2021.
No matter where you’re located as an investor, you’re not limited to purchasing real estate within your current marketplace. Out-of-state real estate investing expands your options so you can choose markets expected to grow.
You can even strengthen the stability of your overall investment portfolio by owning properties across a wide range of different markets because it allows you to diversify your assets. If all your real estate holdings were in one city, and that market was to hit a slowdown, your overall portfolio would take a loss. Diversification can help reduce your overall risk because one market’s performance doesn’t affect your entire portfolio.
Suggested Reading: Guide to Out-of-State Real Estate Investing
Overall, the real estate market is expected to grow in 2022, especially in local markets where demand is high. But in the long term, can we expect the housing market to continue growing?
One reason experts forecast long-term growth in the housing market is that demand is expected to remain high. This is because millennials, the largest generation, have arrived at the peak buying age—they’re forming households and looking to buy their first or second homes. First-time homebuyers represent the largest share (31%) of people purchasing homes.
At the same time, supply is expected to remain low. According to Forbes, it will take several years for homebuilders to add enough new supply to balance the market. A balanced market would have about six months of supply available. This means that the time it would take to deplete all homes for sale at the current sales pace would be six months. But today, the market has only 1.7 months of supply.
As demand outpaces inventory, more and more millennials are renting. Single-family rentals offer the value of living in a house without needing to buy. As mentioned above, there are several benefits of living in a single-family rental compared to a multi-family rental like an apartment complex.
Single-family rentals continue to be a smart investment in 2022 and beyond as homeownership remains out of reach for an increasing number of Americans. They’re an excellent way for newcomers to start their investment portfolio strong with minimal money down.
Have we sold you ontake the next step to investing in single-family rentals? If so, here are a few ways you can get started today:
Lucas is a Content Strategist for Evernest. When he isn’t doing research or creating content, you can find Lucas drinking coffee or eating tacos. He is a native of western North Dakota now living in Austin, TX.