The investment in a single family rental (SFR) offers many benefits to investors and is an excellent way to diversify an investment portfolio. Like with any investment scenario, there are some drawbacks, as well. There are some initial considerations before an investor can jump into the market of investing in SFRs. The upfront cost can be prohibitive to some people, especially those new to the field.
Fortunately, real estate is essentially the only type of investment that can be financed through loans. Financing these types of assets can actually increase the financial returns on such an investment. Before you decide whether or not you should finance an SFR, there are some key points to take into consideration.
Some risks will increase
Short-term investments become riskier options when there are loans involved. For this reason, if you are seeking a quick return on investment, you may want to consider other options besides financing. The reason financing is riskier for a quick turnaround sale of a single family rental is that real estate, including rentals, fluctuate in price. While real estate does generally increase, even a brief monthly decrease can impact the value of your asset, creating more risk if this is a short-term investment.
If you choose to purchase a SFR in cash, you will be shielded from some of the possible initial depreciation. If you own the home outright, a marginal decrease in value of 2 percent will barely affect your equity. But if you take out financing, that small percentage will affect a larger amount of the overall equity. This will not be as much of a factor if you plan on this being a longer-term investment, as the real estate market will likely continue to move in an upward trend
Some risks will actually decrease
When a single family rental is purchased all in cash, the risk of that home’s performance is exclusively tied up in that home. This eliminates some of your potential flexibility as an investor. When you choose to finance a SFR, you will have less money initially tied up in your investment, allowing you to spread it out over multiple properties. This also gives you the added benefit of being able to diversify in multiple markets.
One of the benefits is that you may realize the opportunity for a greater investment. Additionally, your risk is being mitigated by being spread out. If you start to see high returns, you can increase your holdings in a market or expand into other markets. Inversely, if one of your properties is not performing well, you have the opportunity to spread out the loss or devest, without having tied up a significant amount of cash by purchasing the property outright.
At HomeReco, we help investors purchase properties. Instead of trying to tell you how to buy real estate, we let your partner with our experienced and knowledgeable team and buy properties “with” us. This gives you the added benefit of learning the steps of this business without investing all of your all of your capital.