Key takeaways
- Two types of rental properties single-family rentals (SFR) and multi-family rentals (MFR) are popular among investors looking to generate rental income.
- Rising real estate prices, and increasing housing demand will likely continue benefiting property owners.
- MFR opportunities usually require larger investments than SFR, but crowdfunding platforms like Yieldstreet offer investors access to both.
Owning rental properties offers investors two key potential benefits. First, they provide a steady and predictable source of income with the cash flow generated from tenants’ rents. Second, they deliver potential diversification for investors because the forces that influence the real estate market are typically different from the factors that affect the stock and bond markets.
Within the real estate market, single and multi-family housing are two examples of the many different types of properties investors can own – single-family rentals (SFR) or multi-family rentals (MFR). To determine which type may be best for you, it’s important to understand the key characteristics, benefits and potential drawbacks of each property type.
Single-family rentals are relatively easy to buy and manage
- It’s easier to enter the single-family rental (SFR) market. These homes are less expensive than multi-unit properties, so someone can become a landlord with a much lower upfront investment.
- They can quickly generate cash flow. Today’s high demand for rental housing makes it easy to find renters. SFRs can begin generating income for the landlord in the first month of ownership as long as the house doesn’t need major renovations. This may be attractive to SFR investors since the increased expense of owning a multi-family rental (MFR) property and the need to find tenants may extend the time before MFRs become cash flow positive.
- They’re easy to manage and sell. Repairing and updating SFRs is generally going to be much easier, and less expensive, than maintaining MFRs. Additionally, when an owner is ready to sell a single-family home, there could be a bigger market of potential buyers. That includes other landlords, as well as single buyers who might want to own and occupy the house themselves. The MFR market is limited to those who can afford to buy and manage a multi-tenant property so the number of potential buyers could be smaller.
Multi-family rentals are bigger investments (with bigger potential earnings)
- They stand to generate much more income. -MFRs can generate significantly more income than SFRs because they are larger properties with several units to rent.
- You can live there as well as rent space. You can live in one of the apartments, while also generating income from the other units you lease to tenants. Obviously, that’s not possible with a single-family home.
- Banks treat loans for these properties differently and rates may be higher. Getting a loan for a large rental property is not as easy as getting a mortgage for a single-family home. You will most likely deal with a bank’s commercial lending group rather than its mortgage department if the property has five or more units. You’ll also have to clear more hurdles to qualify for a loan, and the interest rates may be slightly higher than those available for regular mortgages.
- You’ll have the potential to benefit from economies of scale. Fixing problems on a large property may be less expensive, on a per-unit basis, than repairs to single-family homes. For example, the cost of a roof replacement on a property with five units could be less expensive because you’d be paying for only one roof. If you had to do the same work simultaneously on five single-family properties, you’d be paying for five roofs.
Current trends are supporting the demand for rental units
Current housing data from the federal government shows demand for rental housing increasing.
So a landlord renting SFRs or MFRs should be able to find tenants and maintain a flow of income from your investment. A number of trends will likely continue to benefit rental property owners.High real estate prices have put homeownership out of reach for many families. For a decade, home prices have continued to climb at much higher rates than wage growth. (See Exhibit 1). That has forced more people to continue renting.
- High real estate prices have put homeownership out of reach for many families. For a decade, home prices have continued to climb at much higher rates than wage growth1, which has forced more people to continue renting.
- Demand for rental units remains high. Vacancy rates are a good indicator of how in demand apartments are. In the final quarter of 2021, the national vacancy rate was 5.8%.2 That remains below the historical average of about 7%.
- Millennials are delaying home ownership. Millennials are buying homes later in their adult lives than previous generations did. Multiple explanations have been suggested for this – everything from their desire to delay getting married and having children so they can maintain flexible lifestyles and remain mobile to the high cost of homes, burdensome student debt levels, and tighter lending standards. Regardless of whether it’s any one of those reasons or all of them, the fact that many members of this sizable generation aren’t purchasing homes increases the demand for rental housing.
Deciding what type of property is right for you is a personal decision, but there is no question the broader trends at play in the economy today make it a good time to own rental housing. Being a landlord also doesn’t mean you have to get out of bed in the middle of the night to fix someone’s leaky pipes. Rental management professionals can make owning properties much easier so that you can simply enjoy the regular income they generate, as well as the potentially significant capital appreciation that can be realized in today’s markets when properties are sold.
How Yieldstreet removes the barriers to investing in real estate.
On crowdfunding platforms like Yieldstreet, you still get the potential benefits of an individual investor considering SFR or MFR, without needing the requisite capital, research, and time to buy a property on your own. If you’re intrigued by the market and are wondering if single or multi-family real estate may help benefit your portfolio, consider Yieldstreet’s real estate offerings.
Learn more about the ways Yieldstreet can help diversify and grow your portfolio
References:
1. Source: Attom Data Solutions, as of Q2 2021, using national median home price (+ percentage gain) and annualized average weekly wage (+ percentage gain) at the fourth quarter of each year, as cited in “Charts Show Challenges to Housing Affordability,” Pro Builder, 1/28/22
2. Source: “Quarterly Residential Vacancies and Home Ownership, Fourth Quarter,” U.S. Census Bureau, 2/2/22
3. Source: “The Real Reasons Millennials Aren’t Buying Homes,” Investopedia, 2/17/22
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2 Represents an average net realized internal rate of return (IRR) with respect to all matured investments in your portfolio, utilizing the effective dates and amounts to and from the investments and net of management fees and all other expenses charged to the investments. Past performance is not a reliable indicator of future results and should not be relied upon as the basis for making an investment decision. All securities involve risk and may result in significant losses, including the loss of principal invested.[read more]