As we head quickly toward 2023, many real estate investors are deciphering their next moves. During 2022, single-family homes were a popular choice amongst many rental investors. But what does the market look like for the next year? Let’s go over why this investment type is so popular and why some SFR investors are getting cold feet.
Contents of This Article:
- What are SFR Investors?
- Why is SRF Real Estate a Popular Investment Type?
- How Rising Costs and Inflation Impacts SRF Investors
- SRF Market Outlook for 2023
- What Does This Mean for Institutional Investors?
- Property Management for Your Single-Family Rentals
What are SFR Investors?
SRF stands for single-family rental property. So, as you can imagine, SRF investors are those that invest in single-family properties.
Generally, single-family homes are standalone properties, different from multi-family units like apartments or duplexes.
Single-family real estate is a steadily popular investment choice because of the consistently high demand. After all, most renters look for single-family residences since they offer more space and privacy compared to living in an apartment.
Why is SFR Real Estate a Popular Investment Type?
If you’re wondering what SFR investors benefit from, there are several reasons this investment type is popular. That said, here are some of the top reasons to invest in single-family real estate.
- Affordable and Profitable
- Easy to Finance and Manage
- Tax Breaks
- High Rental Demand
- Easy to Get Started
Affordable and Profitable
One of the best parts of SFR real estate is the affordability for profitability. Single-family residences are easier to finance compared to other types of real estate, like commercial or multi-family buildings. After all, SFR real estate is built for one family only, so it’s not as expensive as a larger piece of real estate, like an apartment complex.
Additionally, single-family real estate is highly profitable. Once tenants rent them, property owners start earning cash flow from monthly rental payments. That said, depending on the location of your property, you could experience little to no vacancy time, guaranteeing consistent cash flow.
Easy to Finance and Manage
Another reason investors love SFR real estate because they’re relatively easy to finance. For instance, investors generally don’t have to supply a large amount of capital upfront and can finance properties over time. That said, investors can use traditional mortgages, hard money loans, or even leverage existing equity to purchase single-family homes.
In addition, single-family properties are generally easy to manage. While you’ll still want to hire property management in Philadelphia, handling the responsibility of a single-family residence is simpler than multi-family units. After all, you’re only caring for one tenant in one property.
In general, real estate is known for providing great tax benefits and write-offs for investors. Some of the most common tax write-offs for single-family properties include:
- Depreciation- This write-off allows landlords to get a portion of real estate costs over the course of several years.
- Insurance Premiums- Insurance policy premiums are all tax-deductible, including landlord liability, fire, theft, or flood insurance.
- Mortgage Interest- Single-family property owners can deduct mortgage loan payments used to purchase or repair the home.
- Property Repairs- For a home repair to count as a deduction, it must be necessary, reasonable, and ordinary.
- Legal Services- Property owners can write off legal service expenses like accounting, financial advisor, or tax specialist fees.
High Rental Demand
The demand for single-family rental homes has spiked in recent years and continues to remain hot on the market. Additionally, the construction of single-family properties hasn’t increased significantly or met the demand yet. In turn, this means high rent potential and fewer vacancies for SFR investors.
Easy to Get Started
Single-family properties are generally easy investments to make. For instance, the commitment level can vary once an investor finds a rental unit and secures financing. You can either manage your own rental properties or you can hire a rental property management company.
If you live far away from your rental property, it’s crucial to hire property management or an individual you trust to manage your property. Luckily, there are plenty of qualified property managers to help with rental management responsibilities. Just research your local services and choose a management company that aligns with your needs.
How Rising Costs and Inflation Impacts SFR Investors
Although single-family properties are generally a stable investment choice, some market factors are causing SRF investors to slow their pace. For instance, rising interest rates and inflation is causing investors to take a step back from single-family investment properties.
Inflation has made it more expensive to finance homes, repair homes, upgrade homes, and even personalize homes. As such, many investors are navigating inflated prices and harder-to-secure mortgages.
However, not all investors are scared of high prices and mortgage rates. In fact, some investors are taking advantage by using strong rental demand to offset buying costs, according to Sheharyar Bokhari, a senior economist at Redfin.
It’s clear that throughout 2022, elevated costs and inflation rates majorly impacted the real estate market. But what’s going to happen in 2023? Here’s the SFR market outlook for next year.
SFR Market Outlook for 2023
The demand for single-family rentals has steadily increased over the years and shows no signs of stopping in 2023. However, the number of single-family rentals will likely decrease over time due to the ease and profitability of multi-family assets.
Regardless, single-family rentals have seen great returns over the past few years due to their popularity and rising rental rates. The average return on single-family rentals is around 8% to 12%, depending on market conditions and operating expenses.
That said, single-family rentals are a great investment for the new year. After all, most tenants prefer single-family rentals, they’re relatively easy to finance, and returns are promising.
What Does This Mean for Institutional Investors and Landlords?
Generally, institutional investors grow their portfolios by purchasing build-to-rent (BTR) projects from smaller property owners. However, the higher cost of capital and the weak market is reducing the growth of single-family rental properties.
On the other hand, independent landlords purchase single-family residences and rent them out to tenants. However, they’re also struggling with the same issues as institutional investors. Prices are too high for mortgage costs and property expenses, making it hard to earn profits from rentals.
As a result, investors face a challenge. Although prices are high for single-family properties, the demand remains high. After all, it’s becoming harder to obtain homeownership, so more families are willing to rent. However, rental rates aren’t slowing down any time soon. In fact, they may increase throughout 2023. This means landlords and rental investors can take advantage of high demand and increased rental rates to earn higher profits.
Nevertheless, regardless of what rental property investment type you choose, it’s crucial to consider property management. Here’s why.
Property Management for Your Single-Family Rentals
One of the most important business aspects for SFR investors is property management. After all, whether you own one single-family home or 100, you’ll need someone to manage the tenants that live there and schedule maintenance for the property.Contact Bay Property Management Group today!
Bay Property Management Group offers comprehensive rental management to SFR investors, multi-family property owners, and more! We can provide thorough tenant screening procedures, schedule maintenance procedures, collect monthly rent payments, and more.
Contact BMG today if you need full-service rental management in Baltimore, Philadelphia, Northern Virginia, or Washington, DC.