Pros and cons of investing in single-family rentals

Written by Samantha SheltonNMLS 1647301Updated October 2026

This article compares an asset class and is general information only. It is not tax, legal or investment advice, and it is not an offer to sell or a solicitation of an offer to buy any security. Take depreciation, basis and exchange questions to a qualified tax professional, and lease, eviction and entity questions to a Michigan attorney. Align Lending is an independent Michigan mortgage broker that finances one- to four-unit residential property, not a commercial lender, broker-dealer, investment adviser or property manager.

A single-family rental is the cheapest rental property to finance and the only one you can sell to somebody who wants to live in it. Freddie Mac caps a purchase loan on a one-unit investment property at 85% of value, 15% down, while the same investor buying a two- to four-unit rental is capped at 75%, or 25% down. That 10-point gap, plus the resale market that comes with a house, is the honest case for starting here.

The price of that access is concentration. One house holds one tenant, so one vacancy is 100% vacancy, and the U.S. Census Bureau put the national rental vacancy rate at 7.3% in the second quarter of 2026. A twelve-unit building absorbs an empty unit out of current income. A house stops earning entirely and keeps billing you for taxes, insurance and the mortgage.

Learn how the pros and cons of investing in single-family rentals actually trade off: where the financing and exit advantages are real, where per-door economics favor an apartment building, how much cash a single-tenant property obligates you to hold, and what changes in Michigan. New here? Start with our real estate investing guide or compare the field in investment property types.

Key takeaways:

• 15% down instead of 25%: Freddie Mac’s maximum loan-to-value ratio is 85% on a one-unit investment purchase against 75% on a two- to four-unit, so on the same purchase price a house takes about 40% less cash at the closing table.
• Two exit markets instead of one: Existing single-family homes sold at a seasonally adjusted annual rate of 3.69 million in July 2026 per the National Association of REALTORS®, and a rental house can be sold into that owner-occupant market. An apartment building can only be sold to another investor.
• One vacancy is 100% vacancy: Fannie Mae requires six months of reserves on an investment-property transaction, and that is the floor rather than the target, because a single-tenant house earns nothing between leases.

What is a single-family rental, and why is it priced differently from an apartment building?

A single-family rental is a detached one-unit home bought to rent out rather than occupy, and what separates it from every other rental asset is that its value is set by what nearby houses sell for, not by what it earns. An appraiser reaches that value through the sales comparison approach, an analysis of comparable sales and listings of the properties most similar to yours. Net operating income never enters it.

That one fact drives everything below. Valued as a house, it can be financed as a house and sold to a family that will live in it. Valued as a house, it also cannot be made more valuable by raising the rent. The central lever a multifamily owner has.

Single-unit rentals are not a niche. HUD and the Census Bureau reported from the 2021 Rental Housing Finance Survey that about 86% of U.S. rental properties contain only one rental unit, holding roughly a third of all rental units, out of 19.3 million properties and 49.5 million units. About 70% of one- to four-unit rental properties belong to individual investors rather than institutions.

Read that as a trade, not a scoreboard: the left column buys access and liquidity, the right column buys efficiency and vacancy insulation. Our guide to investing in multi-family properties argues the other side of this comparison in detail.

What are the real advantages of single-family rentals?

Four, and only the first two are unique to the asset class.

The financing is ordinary residential credit

A one-unit investment purchase needs 15% down under Freddie Mac’s 85% maximum loan-to-value ratio, against 25% down on a two- to four-unit. The loan is underwritten on you (credit, income, reserves) through the same one- to four-unit residential machinery that finances owner-occupied houses. Fannie Mae buys mortgages where the dwelling consists of one to four units; at the fifth unit the property leaves that system for commercial credit with shorter terms, balloon maturities and debt-service-coverage underwriting.

Two honest qualifiers. Investment-property loans carry pricing adjustments that owner-occupied loans do not, so the rate advertised for a primary residence is not your rate. And the occupancy programs are closed to you: FHA requires the borrower to occupy the property as a principal residence, so a house you never live in cannot be bought with FHA or VA financing at all. That is a genuine point for small multifamily, where an owner-occupant can buy a duplex through a fourplex, live in one unit and put as little as 3.5% down through FHA. FHA also applies a self-sufficiency requirement to three- and four-unit properties that it does not apply to duplexes; confirm the current calculation in HUD Handbook 4000.1.¹

You have two buyer pools at the exit

Existing single-family homes sold at a seasonally adjusted annual rate of 3.69 million in July 2026, against 370,000 for condominiums and co-ops, per the National Association of REALTORS®. There is no comparable public resale market for a twelve-unit apartment building, because the only buyer is another investor running the math you ran.

The Census Bureau counted 87.0 million owner-occupied housing units in the second quarter of 2026 against 46.8 million renter-occupied, so the pool you can list into is the larger of the two. This is the most underrated line in the comparison: your exit is not gated by another investor’s cap-rate assumption.

The building depreciates while you hold it

Residential rental property is depreciated over 27.5 years under the IRS general depreciation system, sheltering part of the rental income during the hold.² Two things about that get stated wrong constantly. Land is never depreciable. The IRS is explicit that you cannot depreciate the cost of land, because land generally does not wear out, become obsolete or get used up, so every depreciation figure needs a basis allocation between land and improvements. And a property qualifies as residential rental property only if 80% or more of its gross rental income for the year comes from dwelling units. See IRS Publication 527 on residential rental property; the allocation belongs to your CPA.

Tenants tend to stay, and the operation is simple

One lease, one tenant, one furnace. That simplicity is real and routinely oversold: HUD’s 2021 survey found only about 22% of one- to four-unit rental properties are managed professionally, so it usually shows up as your own unpaid labor. Confirm demand before you assume long tenancies, using how to analyze a property’s rental potential.

What are the real disadvantages of single-family rentals?

Three structural ones, and better tenant screening does not remove them.

One vacancy is 100% vacancy

This is arithmetic, not opinion. A twenty-unit building at the 7.3% national rental vacancy rate the Census Bureau reported for the second quarter of 2026 loses about 7% of its income and pays its mortgage out of the other 93%. A house does not lose 7.3% in a given month. It earns full rent most of the year and zero during turnover, and the zero months are when the roof leaks.

The lender prices this in: Fannie Mae requires six months of reserves on an investment-property transaction. Hold at least that per house, in cash, after closing. Current figures are in the Census Bureau’s quarterly rental vacancy data, but the rate you underwrite is your submarket’s.

The per-door economics are worse

Census Bureau and HUD data from the 2021 Rental Housing Finance Survey show one-unit rental properties carried higher mean annual operating expenses per housing unit than 5-to-24-unit properties: $6,194 versus $4,534 per unit in 2020. That gap is structural. One roof covers twelve doors in an apartment building and one in a house, and one insurance policy, tax bill, lawn contract and snow contract are all carried by a single rent check.

Scaling does not fix it, because Fannie Mae layers reserves as the portfolio grows: 2% of the aggregate unpaid principal balance on other financed properties with one to four financed properties, 4% with five or six, 6% with seven to ten. The tenth house costs more to hold than the first. Model it in evaluating a property’s cash flow potential.

You cannot force the value up

Because the appraisal comes from comparable house sales, raising the rent $150 a month raises your income and not your value. A multifamily owner who adds $4,800 of annual net operating income in a market pricing at a 6% cap rate has manufactured roughly $80,000 of value. You have manufactured $4,800 a year and nothing on the balance sheet until the neighborhood catches up.

That cuts both ways, and it is a comfort in a downturn: your value is not marked down when rising rates push cap rates out. But appreciation becomes something that happens to you, driven by school boundaries, employment and supply. See real estate appreciation; past performance does not predict future results.

What does the cash flow actually look like on one house?

Build the operating side first, then subtract debt service, and distrust any pro forma missing a line. Here is the arithmetic on an illustrative $230,000 Michigan rental at $1,600 a month.³ For scale, the Census Bureau reported a national median asking rent of $1,531 for vacant for-rent units in the second quarter of 2026.

• Gross scheduled rent: $1,600 a month, or $19,200 a year.
• Vacancy and credit loss at 8%: minus $1,536, leaving $17,664. One 30-day turnover a year is roughly 8%, so this is not conservative.
• Property taxes and insurance: minus $4,800 combined. Michigan taxes are the line most often understated, for reasons below.
• Repairs, maintenance and turnover: minus $1,900.
• Capital reserve for roof, furnace and appliances: minus $1,800. Not optional bookkeeping. It is the cost of the roof arriving in year seven.
• Management at 9% of collected rent: minus $1,590, whether you pay a manager or pay yourself.
• Net operating income: about $7,574 a year, or $631 a month, before any mortgage payment.

Every dollar of principal and interest comes out of that $631. We quote no rate here, because yours depends on your file, your credit, the pricing adjustments that apply to investment property and the day you lock, which is exactly why it is worth shopping. A small pricing difference is a large share of $631.

You will see the 1% rule offered as a shortcut: monthly rent at or above 1% of purchase price. It is a rule of thumb and nothing more, and it is silent on taxes, insurance and capital needs.⁴ Thinner buyer pools demand even more discipline, which is why the math looks different for investing in luxury housing markets, where rent does not scale with price at the top end, and for condo hotels, which carry financing and securities complications a house never does.

What Michigan investors should know

Michigan single-family rentals clear cash-flow screens coastal markets cannot, mostly as arithmetic: the same rent over a smaller purchase price is a bigger percentage. The Midwest also carried a 6.9% rental vacancy rate in the second quarter of 2026 against 9.5% in the South, and the highest regional homeownership rate at 69.0%. The trap is the tax line.

• You lose the principal residence exemption, worth up to 18 mills: Michigan’s exemption covers an owner’s principal residence for up to 18 mills of local school operating millage, and the Michigan Department of Treasury states that income property is not occupied as a principal residence and may not claim it. Convert a home you lived in to a rental and it goes away.
• Taxable value uncaps the year after you buy: Under Proposal A of 1994, a transfer of ownership uncaps taxable value in the calendar year following the transfer, and taxable value resets to the state equalized value, roughly 50% of market value. A long-time owner’s tax bill tells you nothing about yours.
• Underwrite the future bill, not the seller’s: Ask the assessor for the state equalized value and the non-homestead millage rate, then rebuild the statement above. A $2,000 swing in annual taxes is more than a quarter of the net operating income in that example.

One lending note that applies everywhere: calling an investment property your primary residence to get better loan terms is mortgage fraud, a federal crime. If you are weighing living there first, read buying a home as an investment property.

FAQ: Single-family rental investing

Here are answers to common questions about single-family rental investing.

Are single-family rentals better than multifamily?

Neither is universally better. Single-family costs less to enter, finances as ordinary residential credit at 15% down, and sells to owner-occupants as well as investors. Multifamily produces more income per dollar invested, spreads vacancy across units, and lets an owner raise value by raising net operating income at the cost of more capital and, above four units, commercial financing. Many investors start with houses and add units once reserves allow. See tips for new real estate investors.

How much cash reserve should a single-family rental investor keep?

Six months of full carrying costs per property is the floor, because Fannie Mae requires six months of reserves on an investment-property transaction and a vacancy eliminates 100% of that property’s income. Count mortgage, taxes, insurance and owner-paid utilities, not just principal and interest. Investors holding several houses in different neighborhoods can carry slightly less each, since vacancies rarely line up. Reserve planning is part of cash flow in real estate.

Do single-family rentals appreciate faster than apartments?

They appreciate differently, which matters more than faster. A house is valued by comparable sales driven by owner-occupant demand, so its price follows neighborhood desirability, schools and employment. A building above four units is valued on net operating income, so its price follows rents and prevailing cap rates. Single-family appreciation is therefore less controllable and less exposed to cap-rate moves. Past performance does not predict future results; see real estate tax benefits for investors.

What makes a good single-family rental property?

Three bedrooms, at least one and a half bathrooms, off-street parking, and a location inside a solid school boundary within a reasonable commute of employment. Avoid unusual layouts, pools and other high-maintenance features, and avoid homes priced well above the neighborhood median, because rent does not scale with purchase price at the top end. Financing is not finished at closing, see how to refinance an investment property.

The bottom line on single-family rentals

Single-family rentals buy access and an exit. Freddie Mac’s 85% maximum loan-to-value ratio means 15% down on a one-unit investment purchase against 25% on a two- to four-unit, the loan is ordinary residential credit, and the house can be sold into a resale market that moved single-family homes at a 3.69 million annual rate in July 2026. You pay for that in concentration and efficiency: one vacancy is 100% vacancy, one-unit rental properties carried the higher per-door operating expense at $6,194 against $4,534 at 5-to-24-unit properties in 2020, and you cannot lift the appraised value by lifting the rent.

If you’re ready to price a single-family rental purchase or refinance, talk to Align Lending. We’ll shop your scenario across our lender network and show you the investment-property pricing side by side. Call 248-506-5727 or start online today. Take depreciation, basis and recapture questions to a qualified tax professional, and lease, eviction and entity questions to a Michigan attorney.

Footnotes:

1. Align Lending is not acting on behalf of or at the direction of FHA or HUD, and works with VA-approved lenders but is not endorsed or sponsored by the Department of Veterans Affairs or any government agency. FHA and VA occupancy, minimum down payment, self-sufficiency and eligibility requirements are set by HUD and the Department of Veterans Affairs, apply only to one- to four-unit residential property that the borrower occupies, and are subject to change. Freddie Mac and Fannie Mae loan-to-value and reserve requirements are set by those agencies and by the individual wholesale lenders in Align’s network, and are subject to change, credit approval and property eligibility. Nothing here is an offer of credit or a commitment to lend. Return to text.

2. This is general information, not tax advice. Depreciation recovery periods, the allocation of basis between land and improvements, the treatment of a given expense as deductible or capitalized, passive-activity loss rules, depreciation recapture on sale and entity choice all depend on your individual circumstances and change over time. Recapture applies to depreciation allowed or allowable, whether or not you claimed it. Consult a qualified tax professional about your situation. Align Lending is a mortgage broker and does not provide tax, legal or investment advice. Return to text.

3. Example figures are hypothetical and for educational purposes only; they do not constitute an advertisement of credit terms, a rate quote, an offer of credit, or a projection of investment returns under federal or state law. The $230,000 purchase price, $1,600 monthly rent, 8% vacancy and credit-loss allowance, $4,800 of taxes and insurance, $1,900 of repairs, $1,800 capital reserve, 9% management fee and resulting $7,574 net operating income are Align Lending arithmetic shown to demonstrate the method. They do not describe any specific property, market or listing, and they exclude mortgage principal and interest, closing costs, income taxes and any capital expenditure beyond the reserve line. No interest rate is quoted or implied. Actual results depend on the property, the market and your own underwriting. Return to text.

4. The 1% rule is a widely repeated practitioner rule of thumb, not a statutory, regulatory, index-published or underwriting standard, and it carries no predictive force. The same is true of similar shortcuts, including the 2% and 50% rules. Screening heuristics ignore property taxes, insurance, capital needs, submarket vacancy and financing costs, and a property can fail one and still underwrite well, or pass one and lose money. Past performance does not predict future results, and nothing here is a projection or guarantee of any return. Return to text.

Sources: maximum loan-to-value ratio of 85% on a purchase of a one-unit investment property and 75% on a two- to four-unit investment property, Freddie Mac Single-Family Seller/Servicer Guide, Maximum LTV/TLTV/HTLTV Ratio Requirements for Conforming and Super Conforming Mortgages. Six months of reserves required for an investment property transaction, and additional reserves of 2% of the aggregate unpaid principal balance with one to four financed properties, 4% with five to six and 6% with seven to ten, Fannie Mae Selling Guide B3-4.1-01, Minimum Reserve Requirements. Eligibility limited to properties where the dwelling consists of one to four units, Fannie Mae Selling Guide B2-3-01, General Property Eligibility. Definition of the sales comparison approach as an analysis of comparable sales, contract sales and listings of the properties most comparable to the subject property, Fannie Mae Selling Guide B4-1.3-07. Minimum FHA down payment of 3.5% of the purchase price, the requirement that the borrower occupy the property as a principal residence, and the self-sufficiency requirement applied to three- and four-unit properties, U.S. Department of Housing and Urban Development, FHA Single Family Housing Policy Handbook 4000.1 and the HUD FHA Resource Center. Agency non-endorsement: Align Lending is not acting on behalf of or at the direction of FHA or HUD and is not endorsed or sponsored by the Department of Veterans Affairs. National rental vacancy rate of 7.3%, homeownership rate of 65.0%, 86,985,000 owner-occupied and 46,827,000 renter-occupied housing units, median asking rent of $1,531 for vacant for-rent units, Midwest rental vacancy rate of 6.9%, South rental vacancy rate of 9.5% and Midwest homeownership rate of 69.0%, all second quarter 2026, U.S. Census Bureau, Quarterly Residential Vacancies and Homeownership, Second Quarter 2026, release CB26-116, July 28, 2026. Approximately 86% of rental properties containing only one rental unit, about one-third of rental units located in one-unit properties, 19.3 million rental properties holding 49.5 million rental units, 70% of one- to four-unit rental properties owned by individual investors, and about 22% of one- to four-unit rental properties managed professionally, U.S. Department of Housing and Urban Development and U.S. Census Bureau, 2021 Rental Housing Finance Survey. Mean 2020 total operational expenses per housing unit of $6,194 at one-unit rental properties and $4,534 at 5-to-24-unit properties, U.S. Census Bureau and U.S. Department of Housing and Urban Development, 2021 Rental Housing Finance Survey infographic. Existing single-family home sales at a seasonally adjusted annual rate of 3.69 million and condominium and co-op sales at 370,000 in July 2026, National Association of REALTORS, Existing-Home Sales, released August 2026. Residential rental property depreciated over 27.5 years under the general depreciation system, the statement that you cannot depreciate the cost of land because land generally does not wear out, become obsolete or get used up, and the 80% gross-rental-income test defining residential rental property, Internal Revenue Service Publication 527, Residential Rental Property. Principal residence exemption from the local school operating millage of up to 18 mills and the statement that income property is not occupied as a principal residence and may not be claimed, Michigan Department of Treasury, Principal Residence Exemption. Uncapping of taxable value in the calendar year following a transfer of ownership, with taxable value becoming the state equalized value at approximately 50% of market value, Michigan Department of Treasury, Changes in Ownership and Uncapping of Property, and MCL 211.27a.

This article is for informational purposes only and is not intended to provide legal, financial, tax or investment advice, and it is not an offer to sell or a solicitation of an offer to buy any security. Vacancy rates, rents, prices, tax rules, millage rates, agency guidelines and loan program requirements change and vary by property, program and locality; confirm current figures with your loan officer, confirm tax treatment with a qualified tax professional, and confirm assessment, lease, eviction and entity questions with a Michigan attorney. Figures shown are illustrative, are not a rate quote or an offer of credit, and do not constitute an advertisement of credit terms or a projection of investment returns. Past performance does not predict future results. Align Lending is an independent Michigan mortgage broker, NMLS #2041154, that finances one- to four-unit residential property, and is not a commercial lender, broker-dealer, investment adviser, syndicator or property manager.

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