There is a lot of attention focused on single-family homes by investors looking for a great cash flow with high appreciation potential over the next few years.
Single-family rental properties have it all—great demand by renters and good resale opportunities at the end of the investment window. The only problem is that most investors have this same strategy, and single-family homes available for sale are now at record low inventory levels in many metropolitan markets.
Unfortunately, many investors overlook the cash-flow streams that are available with other residential investments.
Multifamily investments in many markets have not been pushed up in value as much as comparable single-family residences, which makes the return on this investment very attractive based on rental income. Many of the single-family homes that are available are now yielding a lower-cap rate due to the increases in home prices.
The SFR rental income investor is competing against other investors and many first-time homebuyers who would like to buy while home values are great, which further complicates the SFR as an investment vehicle.
It is true that single-family homes provide one of the easiest exit strategies for a rental investment strategy, but focusing on this to an extreme will result in overlooking the benefits of strong rental income streams.
A solid cash flow influx will put the future liquidation value of the home at lesser importance in an investment strategy, which is why many investors are focusing on months of rental income to pay off initial investment as a high-level selection criterion.
We all know the power of the net present value of money. When factoring in the uncertainty of appreciation models for the future resale value of the investment, the rental income stream becomes even more important because it is easier to predict with higher levels of certainty.
The shift of homebuyers into rental properties is a trend that will continue for several years until the short sale volume and number of underwater homeowners stabilizes.
However, a focus solely on single-family homes as rental investment vehicles will sideline a lot of investors who still can participate in the terrific rental investment property market. If you are becoming concerned with the lowered returns of single-family homes, consider “testing the water” with multifamily residences.
These investments potentially generate steady streams of cash, and you can be the big fish in a market that is overlooked by many.