Are you a seasoned real estate investor? Or are you just starting or interested? Well, either way, below MarketWatch shows us five things we should know about investing in single-family rental homes. Number four will surprise you!
Originally posted by MarketWatch.
Single-family rental homes comprise more than one-third of all U.S. rental properties — about 16 million currently, with another 13 million new rental households expected to be formed by 2030. Since U.S. housing stock is not keeping up with this future demand, the sector should enjoy a significant tailwind given these favorable supply/demand trends.
Not surprisingly, demand for single-family rentals is at an all-time high and showing no signs of slowing.
There are many attractive characteristics to the single-family rental asset class. For starters, returns have historically moved independently from the stock market, meaning they lack correlation. In fact, data compiled by my company Roofstock show that single-family home prices and stock prices are almost perfectly uncorrelated. This means the ups and downs of the stock market have almost no direct impact on home prices, which tend to change in value more slowly and be influenced by numerous factors such as the strength of the local economy and amount of supply added.
If you’re a newcomer to single-family rental investing, one way to think about it is like an inflation-adjusting bond with an equity kicker. The rental income less operating expenses generates current distributions — like the coupon on a bond — and rents can be adjusted annually, providing inflation protection. Finally, the equity “kicker” comes in the form of building wealth as your tenant pays down your mortgage for you while the property can grow in value over time. It’s entirely possible to get a nice double-digit overall return on your equity over an extended holding period.
Purchasing and owning a single-family rental home is simpler than you might imagine. Here are five tips to get you started:
1. Know your investing criteria first
With any investment, be it stocks, bonds or real estate, you need to know what your objectives are. If you’re focused on safety and security, consider exploring low-risk investment homes that generate steady, reliable yield. An example of this may be a more expensive investment property in a good school district. You’re going to get a lower yield, but you may see better downside protection and less volatility. If you have a longer-term horizon or you’re seeking higher returns, you may want to take on a little more risk. Often, lower-priced homes will be riskier, but you may get higher yields and potentially higher long-term returns.
2. Don’t limit your investment property search to where you live
Consider this: If you lived in Atlanta, you wouldn’t buy Coca-Cola stock simply because its headquarters are local. The same principle applies to real estate investing. If your primary residence, income property, and job are all located in the same area, you have a lot of concentrated risks and are more vulnerable to the swings of the local economy. At Roofstock, an online marketplace for buying and selling leased single-family rental homes, we encourage people to spread risk by investing in markets outside of where they live. (Hiring a local property manager is key here.)
Diversification is just one reason to expand your investment property search. Another is access: If you live in an expensive urban or coastal area with relatively high home prices — the San Francisco Bay Area, for instance — finding an income property that’s cash-flow positive is going to be challenging, to say the least. You won’t be able to find a great income property for $100,000 in Seattle, Denver, or Oakland, Calif., but you can if you focus on the Midwest, South, and Southeast.
3. Separate investing from operations
One of the appeals of investing in single-family rental homes is you can hire strong local property management firms to handle day-to-day management tasks of rent collection, repairs and maintenance, and leasing. Over the past several years, property managers have adopted new technologies and business processes to manage homes more effectively for owners.
While some people do choose to self-manage, hiring a property manager can save you a lot of time and potentially money in the long run. While property management companies typically charge between 7% and 8% of the rent, they manage properties for a living and can work to ensure the property is leased, in good condition, and the tenants are happy. Additionally, using a local property manager effectively allows you to buy properties outside of where you live, as self-managing is difficult if the property is not nearby.