Right now, is an ideal time to invest in single family rentals. With rental demand high coupled with near record low interest rates it has created the perfect storm for buy and hold investors. As profitable as a quality rental property may be there are still many investors who only focus on fix and flip rehabs. There is nothing wrong with a quick rehab deal but there are other ways to build your portfolio. Many investors are scared off by tenant horror stories or are worried about potential issues with the property. These are truly the exception rather than the norm. By looking at the many positives you will realize all the benefits associated with rental property ownership. Here are five reasons to consider investing in single family rentals.
- Cash flow. You can still generate short time income with a rental property. Instead of getting a lump sum as you would from a rehab deal you can slowly earn monthly cash flow. For many investors this is a preferred method of collecting checks. The monthly cash flow amount is based on the purchase price, expenses and rent received but for the right property you can easily generate hundreds of extra dollars per month. With this money you can pay down debt, accelerate mortgage payoff, ramp up marketing or simply increase your savings. If you take care of the property and find good tenants this money will keep coming in every month. When other areas of your business are slow you will appreciate the consistency of monthly cash flow.
- Leverage. There are many obvious differences between a buy and hold rental purchase and a rehab deal. Perhaps the biggest difference is with how the property is financed. With a rehab deal you need to have capital, or find capital, to purchase the cost of the property as well as the repairs. This often calls for you to raise tens, if not hundreds, of thousands of dollars. With a rental property your cost to ownership is much less. Depending on the lender, number of units and credit score you will be required to put anywhere from 15-25% down on the purchase. The difference is that for your say 25% you instantly own 100% of the property. The use of leverage has helped created some of the biggest real estate moguls across the country. They found a way to come up with the down payment and enjoyed the perks of cash flow as well as appreciation. This is especially the case for first time buyers. With an FHA loan you can buy a multifamily property for just 3% of the purchase price. You can live in one unit and rent out any additional units. The down payment can come in the way of a gift or you can utilize lender and seller credits to keep your cash at closing to a minimum. By taking advantage of leverage, you can turn your small down payment into a much bigger piece of the pie.
- Upside potential. Monthly cash flow is nice but there may be a bigger pot of gold at the end of the rainbow. With the right rental property there is a legitimate chance for appreciation. Right off the bat you enter the property with roughly 20% equity. From there, every month that your tenant pays it accelerates the payoff of the loan. You can own the property for years and have a good chunk of equity solely based on your tenant’s contributions. With increased equity you can sell for a profit or consider taking cash out to use in other areas of your business. Perhaps you want to use every extra dollar you can to pay off the loan as quickly as possible. When the loan is paid off you then realize 100% of the cash flow and can live strictly on this income. It may take a while to happen but this is definite long-term potential with a rental property.
- Tax benefits. If you have never owned a rental property you aren’t aware of the many tax benefits afforded to landlords. There are a handful of impactful deductions and write offs that could completely change your tax return for the better. In addition to mortgage interest you can write off any repairs, mileage or updates to the property. It is not uncommon for a break-even rental to yield thousands of positive tax return dollars. You don’t need your accountant to get creative to utilize the tax benefits that are available.
- Ease of exit. With a single-family rental, you are not restricted in any way with your buyer pool. A single-family property can attract first time homebuyers just as easily as buyers relocating or looking to downsize. You do not have to sell to a fellow landlord and do not need the market to change in your direction. Single family properties are the most abundant property type and the most desirable. Two and three family properties may produce a higher upside but also need a niche buyer, usually an investor. With a single-family property, you can easily get out of it and sell whenever you want without too much standing in your way.
There are pros and cons with everything in real estate, with single family rentals being no different. You don’t have to stop how you invest or completely change your niche but you should at least consider adding a single-family rental to your portfolio.
