Every investor knows the value of a diversified portfolio, and single-family rentals provide a great long-term investment for people who want to expand their holdings. Whether you want to increase the number of rental properties you currently own or are wondering if SFR investment is right for you, consider these factors that make rental property investing a perfect route to bigger returns:
1. You can leverage real estate
Financing allows people to put far more money than they have on hand toward real estate. This makes it unique among investments. If you have $200,000 on hand, you could purchase $200,000 in stocks or use that money for a $50,000 down payment on four separate rental properties. This quadruples your potential return on investment compared to a single property, and diversifies your investments across several markets, isolating your money from fluctuations in any individual location.
Generally, home values and rents increase over time. In 2014, homes in S&P/Case Shiller’s 10-city composite index increased their value 4.3 percent. 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 the home each month, but the amount they can reap in rental revenue will grow over time.
2. It fits into almost any investment strategy
Real estate investing is perfect for anyone who wants to supplement riskier investments with long-term choices. While an SFR investment will provide yearly returns, true value develops over time, thanks to the annual increase in home value demonstrated above.
This makes SFR investments ideal for people who want to create supplemental income for retirement, but that’s not the only area where real estate investments excel. If an investor targets properties in the markets where the rental space is rapidly expanding due to population growth and a diminished interest in homebuying, the annual 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.”
Investors should hold SFR properties for several years to reap their maximum return on investment, but that doesn’t mean these homes are poor investments for people who value immediate revenue. If you purchase a home in an all-cash transaction, you will immediately generate revenue from rental income.
3. Your principal is safe
Unlike the stock market, where a sharp downturn can decimate the principal, the money used to purchase a home remains relatively secure and delivers consistent revenue. Real estate often acts as a hedge against larger economic trends. Real estate values and rental rates are more influenced by local economic conditions than national shifts. If you pick properties in an economically vibrant area, your investment can grow even in lean times.
Real estate provides a tangible asset that retains is value despite the national economic climate. People always need housing, and rental housing is particularly valuable when people lack the funds to purchase their own homes. While housing in any location possesses some inherent value, investors can target areas that are experiencing strong population and job growth to buy properties that will appreciate faster. That’s not always necessary, however, as even rental properties in more desirable markets can deliver consistent returns without putting the principal at risk.
4. Tax breaks
You’ll be required to pay two types of taxes on income from SFR properties. The IRS taxes rental income under normal income tax laws, though money from rentals don’t incur Federal Insurance Contributions Act taxes that go toward Social Security and Medicare. These properties can also trigger a capital gains tax when you sell them, but you can get a break on this tax by holding onto a property for longer than 12 months. 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.
Rental properties can also provide tax breaks through depreciation. When you purchase a single family property that you intend to rent for additional income, you can take an annual deduction equal to the value of the building itself divided by the years of useful life for the structure. For residential homes, the IRS caps the building’s useful life at 27.5 years. This annual deduction helps you recover the cost of purchasing a SFR property over time, and counteracts some of the taxes collected on rental income.
5. SFR investing can be easy
Traditionally, real estate investing required a substantial amount of work. The process of locating fast-growing markets for rental homes and researching potentially lucrative properties could be exhausting, and investors had to single-handedly manage tenants and maintain their properties’ physical conditions. Most real estate investors have historically chose 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 investing. HomeUnion eliminates the most difficult parts of investing so investors can take a hands-off approach to earning money from property investments.
HomeUnion provides access to hundreds of prevetted properties. Using a combination of deep data analytics and in-person research, HomeUnion finds the metropolitan areas that will give investors the highest returns on investment.
Once an investor decides on a property, if necessary, HomeUnion can procure financing through an in-house lender. The company handles tenant management and property maintenance, typically the most labor intensive aspects of real estate investing, and even provides assistance if and when the investor decides to sell the house.
Read more at HomeUnion.com