Why Now Is a Good Time to Invest in Single-family Homes

Whether you are new to real estate investing or have been growing your portfolio for years, changes in the economy and market conditions often cause investors to become more cautious with making investments in real estate. You may be wondering about the feasibility of obtaining high returns on investments in single-family properties. In this guide, you'll learn why now may be the ideal time to put your money in the single-family sector. 

What Does Single-family Investing Entail?

Single-family homes include any standalone properties that are contained on their own lots. If you invest in this type of home, you'll be able to rent it out to just one tenant. The main benefit of investing in single-family properties is that you'll obtain consistent returns as long as someone is living in the home. At the same time, the value of the property should increase and allow you to gain even higher returns. 

If you're new to real estate investing, placing single-family rentals into your investment portfolio is easy. While there are considerable maintenance and upkeep requirements when it comes to owning a multifamily property, these requirements are much more manageable when it comes to single-family homes. The renter themselves may be tasked with performing some of the maintenance. 

Recent Data Surrounding Positive Rent Growth

In March 2023, ATTOM Data Solutions compiled and released a report centered around single-family rentals. This report found that the annual rental yield when it comes to three-bedroom homes is currently estimated to rise by 7.5% in 2023. In 2022, rental yields increased by 6.7%. which was the highest increase since 2019. 

A more in-depth look at this data is required, however. If you want to make sound single-family investments that provide you with the best returns, you should consider the place where the investment is taking place. While the gross rental yield for these homes was around 7.5% throughout the entire country, numerous counties were in double digits. The counties with the top rental yields include:

• Charlotte County, FL - 12%
• Mercer County, NJ - 12.7%
• Wayne County, MI - 13%
• Collier County - FL 14.7%
• Indian River County, FL - 15%

The county or city you choose to invest in can make a difference in what returns you earn. Around 29 out of the top 50 counties for rental returns are located in Southern U.S. regions. 

One of the reasons why now is a good time to invest in single-family properties is because of how the broader housing market has performed over the past two years. In 2021, the housing market skyrocketed because of low interest rates and otherwise favorable lending terms. However, the Federal Reserve began increasing interest rates from their historic lows in March 2022. At the time of the first increase, the fed funds rate was at 0.50%. Since then, it has increased to 5.00%, which has caused interest rates on home loans to rise at a similar rate. 

Because of the increase in interest rates, buyers need to spend a lot more to obtain a home at the same price, which has pushed many potential buyers away. Now that there's less demand, home prices are no longer increasing at a high rate. These market conditions offer some notable benefits to investors who want to rent out single-family properties, the primary of which is that rents have been growing consistently over the past two years, which has allowed owners to boost their yields while home values have flattened. 

Another clear sign that single-family investing is strong at the moment is that the build-to-rent market is also displaying high growth. According to Alby Gallun from UrbanLand, the built-to-rent market is likely going to involve more than 130,000 homes being placed on the market this year. This is an increase from the 119,000 built-to-rent homes that entered the market last year. Additional growth should cause development on these properties to eventually reach upwards of 167,000 units in 2025. 

Buyers who want to purchase new homes but are unable to afford them are being tasked with staying in rentals. While many of these individuals and families will opt for apartment living, a significant percentage are still wanting to live in a home and are willing to do so in ones that are available as rentals. Millennial families remain interested in large homes that are situated in safe neighborhoods, which is why many of them choose single-family rentals instead of multifamily ones. 

Rent Growth Continues Despite Slowed Gains

If you're interested in investing in single-family homes but are unsure of how strong this sector is, consider what's happening with rent growth at the moment. As mentioned previously, rent growth for single-family homes is still high. In January, rents for single-family properties grew by upwards of 5.7% since January 2022. Orlando, FL continues to be at the top of the list with rent growth at 8.9% for the same month. 

You may notice that growth in rents on single-family properties is slowing. However, these drops are to be expected and are mainly the result of property values increasing by a rapid rate in 2021 and the beginning of 2022. These rapid increases couldn't continue forever. The current increase of 5.7% from January 2022 to January 2023 still allows owners to raise rates consistently over time. 

In Orlando, January marked the third straight month that the city was at the top of the list in regards to annual rent gains with single-family properties. Miami dropped a couple spots and fell outside of the top three growth areas for the first month since 2021. Of the 20 different metro areas that were tracked, none of them exhibited double digit growth in rents from the beginning of 2022 to the beginning of 2023. 

Even though growth has slowed somewhat, rent growth in every price tier is higher than it was before the COVID-19 pandemic. Lower-priced homes had the strongest growth of the month at 8.5%, which means that these homes had the smallest growth declines when compared to every other tier. 

For instance, homes that were priced at 100%-125% of the median income in the region grew by 5.5% in January 2023. Rents during the same month last year grew by 13.5%. While these differences might seem substantial, keep in mind that none of the metro areas that were observed in this study experienced a drop in rental prices, which is partially why now is a great time to invest. 

Despite the slight decline in rental growth, the increases in every pricing tier are higher than they were before the COVID-19 pandemic. The lower-tier properties experienced rent growth that was around three times higher when compared to the pre-pandemic rate. Even though renting an apartment is more expensive than it's ever been, it's also much more feasible when compared to owning a home. Along with Orlando, the highest rent growths occurred in Charlotte, NYC, and Boston. Phoenix had the lowest growth at just 0.6%. 

Median Rent Prices Remain High

While property values are still high throughout most of the U.S., you can start earning returns on your investment immediately after a tenant moves in. In the 20 metro areas that were evaluated, only five of them had single-family rent prices below $2,000. These areas include the Houston, Philadelphia, Atlanta, St. Louis, and Charlotte metro areas. In comparison, the six areas that have average rents above $3,000 include Honolulu, Los Angeles, San Diego, Seattle, Boston, and NYC. 

Wages are Increasing Quicker than Prices in Over 75% of Markets

You can also be confident that now is a great time to invest in single-family homes because single-family rental yields are increasing at a faster rate than home prices in many markets, according to the ATTOM report. Only 9% of the 212 markets that were measured saw rents for single-family homes increasing at a slower rate than home prices. 

Over the past year, rents have increased by anywhere from 5%-20% depending on the market. Home Values have varied from a 5% gain to a 5% loss. Since home prices have finally begun to level off, you have the opportunity to invest in single-family homes while rental prices are still increasing. 

The U.S. housing market has undergone numerous changes over the past year. Home mortgage rates increased to nearly 7% in early 2023, which caused home values to stop rising for the first time in more than a decade. Inflation has also remained relatively high while the stock market has performed worse in the same period of time. When you add these factors together, a situation is created that allows single-family home investors to benefit from rentals continuing to be highly appealing and single-family homes still being out of reach for many potential homeowners. 

Advantages of Investing in Single-family Homes

There are many reasons why you should consider investing in single-family properties, the primary of which is that these investments are much less expensive when compared to multi-family ones. Because of the lower upfront price, it's easier to qualify for financing when you're looking to buy a residential home. 

When you invest in a multi-family property, you'll need to bring in numerous tenants, which means that the property must be constantly marketed. In a single-family home, only one or two tenants are needed, which reduces the likelihood that you'll need to deal with vacancies. 

When compared to multi-family properties, the pool of buyers for single-family properties is considerably larger. It's also easier to locate a property that you'd be interested in buying because of the high number of single-family properties that are on the market at a given time. Since you won't need to spend as much capital to begin making single-family investments, you can use the remaining funds in your budget to make improvements to the property or invest in other homes. 

Keep in mind that single-family rental homes have increased considerably since the financial crisis of 2007-2008. Between 2007-2016, these homes increased by just over 30%. 

The higher level of accessibility for single-family loans means that you can purchase a home without needing to make a sizable investment. Even if a lender requires a down payment of 20%, your upfront costs shouldn't be as high as they would be if you were investing in a multifamily property. 

Investing in single-family homes gives you the opportunity to earn consistent returns on a relatively low-risk investment. Whether you want to balance a portfolio that contains some risky investments or slowly increase your retirement savings, single-family rentals are more popular than ever. While the economy continues to be volatile, single-family rentals tend to perform well regardless of what's happening outside the real estate market.