What Does SFR Mean in Real Estate & Why It's a Good Type of Property to Invest In
Every real estate professional knows the value of a diversified portfolio. In this article, we'll cover what single-family rental (SFR) properties are and how they provide an excellent long-term investment for people who want to expand their holdings.
What Does SFR Mean in Real Estate?
An SFR property is a Single Family Residential home. In technical terms, it's a standalone property on its own lot.
If you're a real estate investor looking to increase the number of rental properties you currently own or are wondering if an SFR property investment is right for you, consider these factors that make the SFR market the perfect route to bigger returns:
1. You Can Leverage Real Estate Investing
Financing allows people to put far more money than they have on hand toward SFR real estate.
This makes it a unique asset class among investments. For example, if you have $200,000 on hand, you could purchase $200,000 in stocks or invest that money for a $50,000 down payment on four separate SFR rental properties.
This quadruples your potential return on investment compared to a single investment property and diversifies your property investments across several markets, isolating your cash flow from fluctuations in any individual location.
Generally, property values and rents increase over time. This gradual appreciation also improves the rental value of a home, which is used to calculate how much tenants pay the homeowner each month.
An investor with a fixed-rate loan pays a consistent amount toward an SFR property each month. As a result, the amount they can reap in rental revenue will grow over time, making single-family home investing more attractive.
2. SFR Real Estate Fits into Almost Any Investment Strategy
Real estate investing is perfect for anyone who wants to supplement riskier investments with long-term investments. While a SFR real estate investment will provide yearly returns, actual value develops over time, thanks to the annual increase in property value demonstrated above.
This makes SFR real estate investments ideal for people who want to create supplemental income for retirement, but that's not the only area where real estate investments excel. For example, suppose a buyer targets SFR properties in the markets where the rental space is rapidly expanding due to population growth and diminished interest in home buying. In that case, the annual investment returns can also be substantial.
Investors Should Hold Rental Properties for Several Years
Speaking about data his organization gathered in 2014, RealtyTrac Vice President Daren Blomquist remarked, "In the high-risk, high-yield markets, where unemployment and vacancy rates are higher than national averages, the average return was a whopping 19 percent."
Rental property investors should hold SFR real estate for several years to reap its maximum return on investment, but that doesn't mean single-family homes are poor investments for people who value immediate revenue.
If you purchase a single-family home in an all-cash transaction, you will immediately generate revenue from rental income.
3. The Principal On a SFR Property is Safe
Unlike the stock market, where a sharp downturn can decimate the principal, your investment in a SFR property remains relatively secure and delivers consistent revenue. Real estate investing can act as a hedge against larger economic trends.
Single-family home values and rental rates are more influenced by local economic conditions than national shifts. If you pick SFR properties in an economically vibrant area, your single family home investment can grow even in lean times.
SFR real estate provides a tangible asset that retains its value despite the national economic climate. People always need housing, and rental housing is particularly valuable when people lack the funds to purchase their homes.
While investing in single-family homes in any location possesses some inherent value, investors can target areas experiencing substantial population and job growth to invest in SFR real estate that will appreciate faster.
However, that’s not always necessary, as even SFR rental properties in more desirable markets can deliver consistent returns without putting the principal at risk.
4. Tax Breaks for SFR Real Estate
You'll be required to pay two types of real estate taxes on income from SFR properties.
The IRS taxes rental income under ordinary income tax laws, though money from rental properties doesn't incur Federal Insurance Contributions Act taxes that go toward Social Security and Medicare.
Capital Gains Tax
SFR real estate can also trigger a capital gains tax when you sell your property, but you can get a break by holding onto a property for longer than 12 months. SFR real estate is a long-term investment, and if you keep a property for more than a year, you'll qualify for heavily reduced long-term capital gains taxes when you finally decide to sell it.
SFR real estate can also provide tax breaks through depreciation. For example, when you're investing in single-family homes that you intend to rent for additional income, you can take an annual tax deduction equal to the value of the building itself divided by the years of useful life for the structure.
For residential properties, the IRS caps the building's useful life at 27.5 years. This annual tax deduction helps you recover the cost of purchasing a SFR property over time and counteracts some of the taxes collected on rental income.
SFR rental properties enhance any real estate rental portfolio.
5. SFR Real Estate Investing Can Be Easy
Traditionally, SFR real estate investing required a substantial amount of work. The process of locating fast-growing markets for rental properties and researching potentially lucrative properties could be exhausting, and SFR investors had to single-handedly manage tenants and maintain their properties' physical conditions. As a result, most real estate investors have historically chosen to purchase investment properties in markets with geographic proximity to their own homes, as they believed these were easier to manage.
These issues are no longer barriers to SFR investment. Mynd Management eliminates the most difficult parts of property investing so investors can take a hands-off approach to earn money from property investments.
Mynd provides access to hundreds of pre-vetted SFR properties (and multifamily properties too). Then, using a combination of deep data analytics and in-person research, Mynd finds the metropolitan areas that will give investors the highest returns on SFR real estate investments in today's market. It's like working with a realtor who's powered by all the data on the internet.
Once a real estate investor decides on an SFR property, Mynd can make home prices more manageable by procuring financing through an in-house lender. In addition, the company handles the management of renters and property maintenance, typically the most labor-intensive aspects of real estate investing, and even assists if the investor decides to sell the SFR property.
Mynd will also help you save money using tax deductions and reduce your legal liabilities.
It's easy to add value to any residential property investment portfolio by making it partially an SFR portfolio.