Happy Sunday, NOYACKers,
Hey, ambitious wealth-builders! Single-family rentals (SFRs) are transforming the game for HENRYs (High Earners, Not Rich Yet) looking to break free from the paycheck cycle. With rental prices soaring 29.4% since 2020 and homeownership becoming increasingly elusive, SFRs offer a compelling path to steady income and wealth building. Even Jeff Bezos is getting in on the action
What are SFRs? They’re standalone rental homes that give tenants the suburban experience without the commitment of buying. Post-pandemic, they’ve become increasingly attractive to families and remote workers seeking more space and privacy. For Millennial and Gen Z investors, SFRs represent both a flexible housing solution and a powerful wealth-building opportunity.
Here’s some stats that’ll make you think:
Since 2020, rental prices have shot up 29.4%
31% of all U.S. renters are living in single-family homes
And it’s not just a pandemic anomaly: rentals have been steadily increasing over 31% over the last ten years.
SFR incomes continue to outpace multi-family rental incomes.
Ready to dive deeper? Check out Edition 152 of Noyack Wealth Weekly below to learn why SFRs could be your key to financial freedom.
Let’s get after it!
Now for the Ultimate Guide to Single-Family Rental Investing for Millennials
What Are Single-Family Home Rentals?
Single-family home rentals are standalone houses leased to tenants, offering the comfort of suburban living without the long-term commitment of ownership. These rentals provide more space, privacy, and flexibility than apartments—perfect for families, remote workers, or anyone looking for a bit more room to breathe.
With the rise of remote work and shifting lifestyles during the pandemic, single-family rentals have surged in popularity, becoming a go-to housing solution for many. For Millennials and Gen Z, investing in or renting these homes offers a pathway to more adaptable living and, for investors, a solid opportunity to build wealth.
Are You Ready for SFR Investing? Your SFR Decision Checklist:
- Does investing in real estate align with my long-term financial goals for cash flow and wealth building?
- Can I comfortably afford the down payment and ongoing property costs without straining my budget?
- Have I chosen a location with strong rental demand, promising growth, and attractive neighborhood features?
- Am I prepared to manage the property myself or find a reliable property management company?
- Do I have a plan to handle risks like vacancies, maintenance surprises, or tenant issues?
- Am I aware of the tax benefits and potential savings?
- Am I committed to holding the property long enough to see meaningful returns and build equity?
1. What’s your why? Does Investing in Real Estate Align with Your Long-Term Financial Goals?
Retirement: SFRs provide steady, passive income and property appreciation, making them a reliable supplement to retirement funds. Unlike volatile stocks, they ensure predictable cash flow, supporting a stable income through market cycles​.
Family Financial Planning: SFRs offer ongoing income and an asset that can be passed down, fostering financial security for future generations. They also teach financial management, reinforcing a lasting family legacy​​.
Portfolio Diversification: Including SFRs adds stability to a portfolio with low market correlation, providing rental income and capital gains that balance risk and support long-term growth​​.
Philanthropy: SFR income can fund charitable donations consistently, or properties can be donated for significant tax benefits. This aligns financial health with personal giving goals, enhancing impact​​.
2. Can I comfortably afford the down payment and ongoing property costs without straining my budget?
Hypothetical Case Study for Direct SFR Investment
Meet HENRY, a 34-year-old Senior Software Engineer in Dublin, Ohio, making $150,000 annually. He and his wife, Sarah, sought more than just a comfortable income—they wanted financial independence. By investing in an SFR, they aimed to generate passive income, build equity, and secure their future.
The Numbers Behind HENRY’s Investment
Initial Details:
- Property Cost: $500,000
- Down Payment: $150,000 (30%)
- Loan: $350,000 at 6% interest for 30 years
- Monthly Costs: $2,878 (including mortgage, taxes, insurance, and maintenance)
Projected Monthly Income:
- Rental Income: $4,500
- Net Cash Flow: $1,622/month ($19,464 annually)
Four-Year Financial Highlights
- Property Appreciation: Assuming a 5% annual growth rate, the property’s value reaches ~$607,750 after four years, adding $107,750 in equity.
- Loan Paydown: $28,800 over four years.
- Tax Savings: Depreciation deductions save around $17,455 in taxes over four years (24% tax bracket).
Total Return After Four Years: $231,861
ROI: ~154.57%
Annual Cash-on-Cash Return: ~12.98%
Why This Works for HENRYs
- Strategic Leverage: A 30% down payment strikes a balance between risk and return.
- Positive Cash Flow: Covers all expenses and adds reliable monthly income.
- Wealth Accumulation: Appreciation and loan paydown bolster net worth.
- Tax Advantages: Depreciation deductions minimize taxable income.
- Diversification: Expands a portfolio typically weighted with stocks and retirement funds.
3. Have I chosen a location with strong rental demand, promising growth, and attractive neighborhood features?
According to NerdWallet, these markets have seen the highest growth in rental markets:
Cincinnati: +9.2%
Boston: +8.7%
Louisville, KY: +8.3%
Indianapolis: +8.2%
Providence, RI: +7.8%
Choosing the right location can make or break your SFR investment. Certain cities, like Cincinnati (+9.2%) and Boston (+8.7%), have seen considerable rental growth. Here’s how to identify promising spots:
- Research Local Trends: Platforms like Zillow and Redfin can help track market data and price trends.
- Neighborhood Features: Prioritize areas with good school districts, low crime rates, and strong walkability to attract high-quality tenants and command higher rents.
4. Am I prepared to manage the property myself or find a reliable property management company?
Will you manage the property yourself, or outsource management?
If choosing to manage yourself, here are some technology options to make that task easier:
Mynd is a real estate platform that assists investors in finding, buying, leasing, managing and selling investment properties. Yardi Breeze and Appfolio are two options that offer cloud-based property management software with many options including automating billing, maintenance and budgeting. Track the sustainability of your investment with a software like Measurabl, which can pay dividends in both expense savings and the competitive edge of your portfolio.
5. Do I have a plan to handle risks like vacancies, maintenance surprises, or tenant issues?
Having a risk management plan is essential for SFR investing. Budget conservatively by maintaining a financial buffer to cover potential vacancies or unexpected repairs—ideally 1-3% of the property value annually for maintenance. For tenant issues, develop a thorough screening process to reduce the risk of non-payment or damages. Additionally, consider landlord insurance for extra protection against significant property damage or legal disputes​​.
Investing in SFRs comes with challenges, so being prepared is essential:
- Maintenance Surprises: Always keep a reserve fund to cover unexpected repair costs and ensure smooth cash flow.
- Tenant Issues: Late payments or property damage can escalate expenses if not managed carefully. Implement thorough tenant screening to minimize these risks and maintain clear communication and agreements.
- Periods of Vacancy: Budget conservatively to prepare for times when your property might be unoccupied, impacting your income.
- Regulatory Changes: Stay informed about evolving landlord-tenant laws, as they can vary by state and significantly impact your rental strategies.
- Housing Market Volatility: Unlike the stock market, where sudden events can cause drastic price shifts, real estate prices typically move more gradually. SFRs act as a hedge against inflation and economic uncertainty, allowing for a long-term investment outlook. Mortgage rates can influence the market, but with the ongoing supply-demand imbalance—more renters seeking homes than available properties—SFRs are positioned to maintain value and grow even during economic fluctuations.
Pro Tip: Choose landlord insurance that offers comprehensive coverage, including dwelling protection, liability coverage, and loss of rental income. Opt for a higher deductible to lower premiums but ensure you have savings to cover it. Bundle policies for discounts and select insurers with strong financial ratings. Look for specialized landlord policies that cover tenant-caused damage and legal fees, and consider endorsements like flood or building code coverage for added protection.
6. Am I aware of the tax benefits and potential savings?
Tax advantages are a major draw of SFR investing, particularly through accelerated depreciation. Unlike straight-line depreciation, accelerated depreciation offers larger deductions in the early years, which can significantly lower your taxable income. Here’s why this matters:
- Enhanced Early Cash Flow: Reduced tax bills mean more cash in your pocket for reinvestment or scaling your rental business.
- Offsetting Other Income: These paper losses can offset other sources of income, such as dividends or additional rental profits.
- Bonus Depreciation: Qualifying property types may be eligible for 100% bonus depreciation, enabling substantial first-year write-offs.
- NIIT and QBI Benefits: Income from self-rentals may avoid the 3.8% Net Investment Income Tax (NIIT) and qualify for the 20% Qualified Business Income (QBI) deduction.
Pro Tip: Accelerated depreciation can lead to depreciation recapture taxes when selling the property. Consult a tax professional to ensure optimal tax planning and strategy.
7. Am I committed to holding the property long enough to see meaningful returns and build equity?
Investing in single-family rentals (SFRs) requires a commitment to a longer time horizon to maximize returns and build equity effectively. Properties typically need 5-10 years to appreciate significantly and allow the benefits of mortgage amortization and rental income to compound. If you’re considering SFRs, decide whether you prefer the steady path of long-term rentals or the potentially lucrative but variable approach of Airbnb-style short-term rentals.
Long-Term vs. Airbnb Rentals: A Strategic Comparison
Choosing between traditional long-term tenants and Airbnb can shape your income strategy and management style. Here’s a quick overview to help guide your decision:
| Aspect | Single-Family Home Rentals (Long-Term) | Airbnb Rentals |
| Initial Investment | Lower entry cost with conventional or FHA loans | Higher initial costs due to furnishing and décor |
| Financing Options | Easier with conventional loans | May require higher credit, more complex financing |
| Cash Flow Potential | Steady and reliable monthly income | Potentially higher but variable cash flow |
| Management Effort | Low; can be self-managed or minimally overseen | High; requires active management or a property manager |
| Tenant Turnover | Low; stable, long-term tenants | High; frequent turnover with short stays |
| Maintenance Costs | Generally lower with fewer issues | Higher due to frequent guest usage |
| Occupancy Stability | High; year-round rental | Seasonal and market-dependent |
| Quality of Tenants | Stable, longer leasing terms | Mixed; varied guest expectations |
| Passive Income Level | More passive with minimal oversight | Less passive; requires ongoing attention |
| Market Demand | Steady for long-term housing | High in tourist-heavy areas |
| Regulatory Environment | Typically fewer regulations | Subject to local laws for short-term rentals |
| Property Wear and Tear | Lower due to fewer turnovers | Higher from frequent guest changes |
| Income Variability | Stable and predictable | Inconsistent due to seasonality |
| Tax Benefits | Standard real estate tax deductions | Potentially higher but complex deductions |
| Management Software | Managed with standard rental software | Specialized tools needed for Airbnb |
| Aspect | Single-Family Home Rentals (Long-Term) | Airbnb Rentals |
| Initial Investment | Lower entry cost with conventional or FHA loans | Higher initial costs due to furnishing and décor |
| Financing Options | Easier with conventional loans | May require higher credit, more complex financing |
| Cash Flow Potential | Steady and reliable monthly income | Potentially higher but variable cash flow |
| Management Effort | Low; can be self-managed or minimally overseen | High; requires active management or a property manager |
| Tenant Turnover | Low; stable, long-term tenants | High; frequent turnover with short stays |
| Maintenance Costs | Generally lower with fewer issues | Higher due to frequent guest usage |
| Occupancy Stability | High; year-round rental | Seasonal and market-dependent |
| Quality of Tenants | Stable, longer leasing terms | Mixed; varied guest expectations |
| Passive Income Level | More passive with minimal oversight | Less passive; requires ongoing attention |
| Market Demand | Steady for long-term housing | High in tourist-heavy areas |
| Regulatory Environment | Typically fewer regulations | Subject to local laws for short-term rentals |
| Property Wear and Tear | Lower due to fewer turnovers | Higher from frequent guest changes |
| Income Variability | Stable and predictable | Inconsistent due to seasonality |
| Tax Benefits | Standard real estate tax deductions | Potentially higher but complex deductions |
| Management Software | Managed with standard rental software | Specialized tools needed for Airbnb |
Making the Choice:
- Long-Term Rentals: Best if you’re looking for stable, consistent income with less management involvement. This path supports long-term wealth building and equity accumulation.
- Airbnb Rentals: Offers the potential for higher cash flow but comes with more variability and hands-on management. It’s suitable if you’re willing to navigate seasonality and more frequent tenant turnover.
Deciding between these strategies depends on your investment goals, desired involvement level, and comfort with market variability.
Final Thoughts: Is SFR Investing Right for You?
Single-family rentals (SFRs) offer millennials and HENRYs a practical way to build wealth through an income-generating strategy that supports retirement planning, family financial security, and portfolio diversification. Unlike purely growth-focused investments, SFRs provide steady cash flow and gradual equity growth, aligning with a goals-based approach that emphasizes achieving tailored financial outcomes​​.
By clearly defining your investment goals—whether securing retirement income, supporting family financial planning, or diversifying your portfolio—SFRs can be a reliable cornerstone of your financial strategy. Start by researching promising locations, assessing management preferences, and planning for costs and tax advantages. With thoughtful preparation, SFR investing can empower you to create a stable, income-producing asset that underpins your long-term financial future​​.
Expert Interview: Daniel Dorfman (Roots)
To help us better understand Real Estate Investing, we sat down with Daniel Dorfman, Co-Founder at Roots (a Reg A+ REIT). Check out our interview with Daniel below 👇:
Daniel is an innovator on a mission to change the landlord tenant relationship forever, focusing on how residential income can produce real estate, delivering excellent investment returns while making a significantly positive impact on the community. Daniel wants to empower Real Estate Investing in the younger generations and help a million people build wealth.
đź“ş WHAT WE’RE WATCHING
Why it May be Time to Rent the American Dream
This video from Bloomberg explains why the SFR market looks particularly promising. It also goes into the reason investing in the rental market is still a good option once the Fed stops raising interest rates.
👂 WHAT WE’RE LISTENING TO
Check out this insightful Real Estate Podcast
Josh Roche, a veteran in the office of Lloyd Capital Partners, offers practical guidance on what to expect with respect to returns with your SFR. He also gives a brief overview of the evolution of the SFR market and why it’s gaining traction.
Listen to the Podcast here
📖 WHAT WE’RE READING
Real Estate Investors are Quietly Scooping up Single Family Homes
This article explains the data behind the rise in SFR and explores why it’s been such a hot option with investors.
đź’ Tweet of the Week
The Noyack Wealth Weekly Team
CJ Follini, editor and writer, in New York. Anwar Adam, associate editor, in Boston. Paola Saladin, operations manager, in Tampa. Steven Alesso, content creation, in New York.
