This year has been full of economic ups-and-downs. Many of us are finding ourselves feeling anxious about our investments, even as the real estate market proves itself to be as strong as ever in the midst of it all. However, when we look at the real estate market — and the opportunities it provides for real estate investors — we must be sure to look in the right places. After all, the wide variety of property types and investment strategies are not created equally. For real estate investors, weighing the effectiveness and equity growth in different types of real estate investments is critical.
If there’s anything that this tough year has proved, it’s that single-family rentals are the best of the best when it comes to investing in real estate. Let’s talk about why.
An Uphill Battle for Some Real Estate Sectors
The unexpected strength of the real estate market has been stealing a majority of the headlines. Of course, we can’t talk about real estate as if it is a monolith. Specific areas of the market — namely commercial and multifamily properties — have seen some level of distress over the past six months.
Commercial Real Estate
Commercial real estate, including shopping centers and retail, office spaces, and restaurants have all struggled due to COVID-related restrictions, societal adjustments, and lagging business. With a shift in favor of at-home offices and online shopping, especially now, many brick-and-mortar businesses are suffering a lack of foot traffic that has led to problems paying rent. While some commercial real estate — such as self-storage and warehouse properties — are doing fine, many commercial sectors are struggling. Hotels, specialty shops, restaurants, and office spaces face challenges, both for their renters and owners.
Of course, when we talk about real estate investment, the usual debate is between the big two of residential real estate: multifamily and single-family properties.
Multifamily Real Estate
Multifamily real estate has also seen its fair share of struggles throughout the coronavirus pandemic. The faltering of multifamily demand is reflected in the construction sector, where new multifamily housing starts caused overall housing starts to drop by 5.1 percent despite rising confidence among single-family homebuilders.
Multifamily home starts dipped by a whopping 22.7 percent where single-family construction rose by 4.1 percent. While new homebuilding efforts have been on the rise since the Great Recession, many markets have long struggled with a lack of supply to meet growing demand — something that has pushed home prices up for over a decade.
Though home building permits, in general, have declined in the South due to tropical storm and hurricane damages, the pent-up pandemic demand for housing is reflected in both builder and buyer confidence.
Why Single-Family Rentals?
Current trends certainly favor the single-family rental. Because many real estate markets, on the whole, are facing a crisis of affordability, many would-be buyers find themselves renting by necessity, even as low interest rates provide a once-in-a-lifetime incentive to buy. While residents in any type of rental unit tend to struggle more economically than their home-owning counterparts, we’re seeing a surge of demand for single-family rentals that proves not only consumer interest but intent.
People increasingly want to remove themselves from cramped, high-density markets and living conditions. This has led to a desire for single-family rentals, those properties with private outdoor spaces, more distance between household members, and room for home offices. Current trends simply fall in favor of the single-family rental in many, many markets. Not only that but investors, too, can take advantage of current interest rates and financing.
One of the biggest advantages of single-family properties is their accessibility for investors. It can be difficult to purchase an expensive multi-family property, and harder to sell when an exit strategy is called for. Single-family properties, by contrast, are more affordable and come in higher volumes. Competition may be steep, but there’s more to go around for investors and homebuyers alike.
For the investor, the fact that you are buying individual properties also means that you can better diversify your portfolio. Buying a multifamily property may diversify your income stream through the number of units, but not in the market. For real estate investors, having multiple sources of passive income is necessary for long-term wealth building. However, diversifying across multiple markets, not just in volume, further hedges against risk.
Single-family rental properties are popular, true, but this alone is not the reason to invest. The fact that single-family rental properties are a time-tested, effective investment strategy is!
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