An intro to investing in single-family rental (SFR) real estate

The single family home is deeply entwined in the American self-image, and it has long been the dominant housing option in this country, making up about two-thirds of the housing stock in the United States, with most located in suburban neighborhoods.

What does SFR mean in real estate?

SFR stands for “single-family rental” which is a label assigned to standalone rental properties. SFRs are sometimes known as single-family residential properties, and an estimated 1 in 5 Americans rents a single family home.

A number of factors influence the growth of single-family rentals as a share of the housing market.

The incubation of the SFR market as an asset class can be traced to the housing crisis of 2008. 

Between 2006 and 2016, according to a report from the Terner Center at the University of California at Berkeley, more than 3.8 million additional households became renters of single family homes. 

SFR properties are now the fastest-growing segment of the housing market, with many leaving urban centers for larger homes in the suburbs as the Covid-19 pandemic put a premium on more space. The shift to remote work appears to be sticky, as few workers are returning to the five-day commute.

In the last five years or so, institutional investors have shifted assets to the SFR market and in some places are now competing with families looking to buy a home.

Still, institutional investors only represent about three percent of the SFR market, so there are plenty of opportunities for the small investors to get into the game. 

Doug Brien, the CEO of Mynd, calls SFR rentals the greatest vehicle for creating intergenerational wealth in this country. Mynd is designed to guide an investor on each phase of the property investment and management journey. 

There are at least seven good reasons that make SFR investing an excellent opportunity for the average American.

1. Leverage can be used for real estate investing

Most people can borrow significant sums to buy property. Financing allows the average person to use leverage to make purchases of SFR real estate that can generate monthly income (cash-on-cash) and simultaneously build equity over time. 

For example, an investor with $50,000 can use that for a 25 percent down payment on a home priced at $250,000, and then rent it out.

If the investor chooses an area with a solid rental market and uses Mynd’s rental return calculator, an estimate of the total return on investment (ROI) is simply a matter of plugging the numbers in.

Property values and rents generally increase over time, so cash flow can grow. In addition, the appreciation in the value of the home will enhance the equity an investor builds up in the home as the years pass.

2. SFR real estate fits most investment strategies

Real estate investing is a good way to balance risk in other parts of a diversified investment portfolio. SFR purchases work well for people who want to create supplemental income for retirement.

Buyers are encouraged to hunt for properties in the cities where the rental market is healthy, the population is growing, and jobs are available.

With Mynd’s all-in-one investment platform, investors can make those purchases and manage those properties 100 percent remotely.

3. A buy-and-hold real estate investing approach works for SFR

Rental property investors are encouraged to hold SFR real estate for several years to reap its maximum return on investment and avoid the higher capital gains taxes that come with buying and flipping a house within a year. 

For those who buy and hold and see significant capital gains, one way to avoid a significant tax bite is to execute a 1031 Exchange, where the proceeds of a property sale are reinvested in another property or properties.

Any capital gains reinvested through a 1031 Exchange are exempt from taxes.

4. SFR is less volatile than the stock market

Stock market volatility, which has battered many portfolios in 2022, has many investors looking for alternative assets that will protect capital.

A sharp downturn in stocks can dramatically reduce principal, while SFR investments are tangible assets and tend to withstand market volatility.

One exception was the housing crisis of 2008-09, but the underlying causes of that crash — weaker lending standards and the trading of subprime loans — are no longer in place.

5. SFR investing acts as hedge against inflation

Aside from generating cash flow, investing in real estate can act as a hedge against larger economic trends, including inflation, which has pushed past nine percent in 2022.

Single family home values are more influenced by local economic conditions than national trends, while rental rates generally rise in inflationary periods. When mortgage rates rise, fewer can afford to buy a home, increasing demand in the rental market.

Inflation means that the money paid back on a fixed monthly payment on a loan decreases in value over time, benefitting the borrower. As the loan is paid down, the property owner builds equity.

Buying properties in stronger, economically vibrant markets such as Atlanta, Las Vegas, Raleigh, San Antonio and other areas with strong potential for growth offers advantages for investors over the long term.

6. Tax breaks for SFR real estate

There are two types of real estate taxes on income from SFR properties. The IRS taxes rental income as ordinary income, but it is exempt from taxes that go toward Social Security and Medicare. 

Capital gains tax

SFR real estate can also trigger a capital gains tax when a property is sold, but holding onto a property for longer than 12 months reduces the tax rate.

If a property owner lives in a home for two of the previous five years when it comes time to sell, the owner can exclude $250,000 worth of capital gains for a single filer, and $500,000 if the sellers are married and file a joint return.

Any gains above these exclusions would be taxed at capital gains rates. These so-called long-term capital gains are taxes at a rate of 0, 15 or 20 percent depending on the seller’s taxable income and filing status.

Depreciation

SFR real estate also provides tax breaks through depreciation, which is 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. Depreciation allows an investor to recover the cost of purchasing a SFR property over time and counteracts some of the taxes collected on rental income.

7. SFR real estate investing in a one-stop shop

Traditionally, SFR investments required a substantial amount of work, including locating fast-growing markets for rental properties, researching cap rates on homes (basically, the return on investment), managing tenant relations and leasing, and maintaining a property.

Most investors have chosen to purchase properties that were near where they lived. With Mynd, remote investing is now a seamless process.

The Mynd advantage

With Mynd’s technology-based platform, investors can find, finance, buy, insure, manage and sell 100 percent remotely.

Utilizing a combination of deep data analytics, in-person research, and on-the-ground expertise, Mynd has transformed SFR into an asset class that the average investor can access. Its investment advisors can direct its clients to the best markets that offer the best returns.