If you have been thinking about investing in rental property, you undoubtedly considered buying and renting out a home. Real estate professionals refer to this investment category as single-family rentals, or SFRs for short. Back in 2012, a few years after the financial crisis, Warren Buffet said that he’d buy a couple hundred thousand single-family homes if there were a practical way to do it. If buying and renting out homes passes muster as an investing strategy with the Oracle of Omaha, it could be right for you too.

In all, there are about 15.8 million single-family homes rented out each year, which amounts to about one-third of the U.S. rental housing stock, according to the 2019 State of Nation’s Housing, a report produced by the Joint Center for Housing Studies of Harvard University.

Suburban single family home
A single-family home

The Decline in Single-Family Rentals

Over the last few years, the number of single-family rentals has declined as homes have been converted over to owner occupancy. The decline in single-family rentals matches a broader trend of declining renter households overall. In fact, the share of renter households in the United States has declined by a full percentage point over the last few years to about 35.6 percent as more people have chosen homeownership. It is important to put these falling numbers in perspective. While renter households have declined in recent years, the share of renter households was only about 31 percent back in 2005.

Does the decline in the stock of single-family rentals mean you should stay away from SFRs? Not necessarily. Supply and demand fundamentals have been favorable. Single-family rental vacancy rates stood at about 5.8 percent in the first quarter of 2019, down from 6.2 percent a year earlier, according to the US Census Bureau’s most recent Housing Vacancy Survey.

The best bet may be to seek out single-family homes that cater to certain subsets of renters. While there has been a decline in renter households overall, there has been an increase in the number of households rented by people aged 55 and older as well as in high-income renters. Households making over $75,000 make up over 25% of renter households, a large six percentage point increase over the last ten years.

Pros and Cons of Investing in Single-Family Rentals

Some of the pros of investing in SFRs include:

  • Availability of Attractive Financing. It is possible to obtain a loan to finance up to 80% (and sometimes more) of the purchase price. FHA, Fannie Mae and Freddie Mac offer long-term, fixed-rate loans, which allow for flat mortgage payments for up to 30 years. This relatively high amount of leverage can help to achieve attractive returns on your investment capital.
  • Income Tax Benefits. Property owners benefit from mortgage-interest and depreciation deductions, which can result in taxable income that is lower than actual realized income.
  • Investment Portfolio Diversification. Real estate investments can help to diversify an investment portfolio away from just stocks and bonds. With the addition of real estate to an investment portfolio, investors can expect investment returns that are less correlated with the ups and downs of the stock market.
  • Desirable Property Type.
  • Single-family homes tend to be detached structures with a private yard and garage, which are nice amenities not typically available to renters in large apartment complexes. They’re often in suburban areas, although you can find a single-family rental property just about anywhere.

Here are some of the cons associated with SFR investments:

  • Management Intensive. You’ll have to be ready to market the home when tenants move out as well as handle ongoing repairs and maintenance. As you can imagine, some tenants would take better care of your property than others.
  • Rent Collection Hassles. You guessed it. Sometimes tenants are late with paying rent or just skip out on the landlord entirely.
  • Uneven Performance. Landlords should expect their property to perform worse during economic downturns. When the overall economy is weak, the number of renter households declines as young Americans move back in with their parents or share apartments with roommates.

To find single-family rental properties for sale, visit our Buildings for Sale page and tell us a bit about your investing criteria. We’ll keep you posted as properties become available for sale.