Single-family rentals make up over ⅓ of all U.S. rental properties—that’s about 16 million currently. Moreover, another 13 million are projected to be formed by 2030. And if arithmetic isn’t your strong suit, that’s approximately 29 million single-family rentals within about the next decade (roughly double what it is currently).
While this gap echoes what the Multifamily (MFR) asset class experienced before it dramatically changed from units predominantly owned by individual investors to now more than 60% of all MFR units owned by institutional investors, it isn’t yet clear how the transition will occur or exactly how long it will take.
Currently, the number of available distressed properties hitting the market for value-added buyers, both large and small, is significantly down. Many investors are looking to build new residential units specifically to become rentals instead of a sale to an owner occupant. However, due to the failure of our current housing stock to keep up with demands, investors and renters alike should expect a booming period of consolidation in the coming years as the institutional appetite for exposure to this asset class increases and leverage opportunities become more plentiful with additional securitization offerings.
If you’re looking to capitalize on this investment strategy and possibly increase your exposure to the SFR asset class over time, you’ll want to make sure you have a solid strategy before you enter the market. To help shed light on some industry best practices in this sector, below are a few broad tips to keep in mind when beginning to invest in single-family rentals.
Learn Your Investment Strategy
With any investment, you want to know as much as you can about the strategy prior to making your first move. Personally, I learn by doing but even knowing that about myself, I have to complete my diligence first so I can at least try to understand what I am attempting to do prior to the “real learning”. A good starting point is to assess the amount of time you’re personally willing to invest while also examining your appetite for risk. Are you looking for something that is low-risk and low-hassle? If so, the returns may be lower.
For example, a higher grade of property may be what you’re looking for which will generally cost more and be located in a more affluent town, good school district, and a low crime area. Sure, the investment will be more expensive and you’ll get a lower yield, but it’s also likely you’ll receive better downside protection and less volatility. In other words, while this investment may require more out-of-pocket cash upfront, the safety and security you experience may be worth it to you, depending on your investing outlook and personal time commitment you invested in and assessed prior to pulling the trigger.
What if you’re looking for a property you can purchase at a lower price point that should yield higher returns? In this case, you’ll be looking to invest in a bit of a fixer-upper where you could possibly add value by doing some of the rehab work yourself. For a myriad of reasons, lower-priced homes often come with more risk, including turnover and ongoing maintenance fees. But if you have your investment sights set properly and you know yourself well, this sort of property may better suit you and your personal investment strategy, especially if you possess the needed skills to help revamp the structure into something people are actually interested in renting.
Don’t Stay Local
This is the opposite of what most old school real estate investing gurus would say, but the game has changed. Information is more readily available today including “turnkey” providers who for a fee, will do much of the heavy lifting in building a rental portfolio for you. (Homeunion, Roofstock, Investability).
While the ease of all your investments being just down the street is a nice thought, it just may not be the best investing strategy for you. But diversifying the area of your SFR investments could be beneficial because (1) it helps expand the possibilities of finding investments that meet your strategy and (2) because it affords you the opportunity to add assets in markets with different characteristics including vectors such as job growth and retirement migration.
Of course, with diversification comes some downside such as almost having to absolutely use a local property management and maintenance company to assist with the handling of that rental unit. The good news here is most of the single-family residential focused property management companies include handling maintenance services as part of their overall compensation. The downside in hiring a property manager is the fee you’ll pay for that service which is generally in the 7-10% range annually plus additional fees for marketing and leasing the unit.
You’ve probably heard all of these cliches before: win the war even if you lose the battle; it’s not a marathon it’s a sprint. But when it comes to real estate investing, especially with a single family residential focus, this is undoubtedly true; it is a long-term game. Don’t buy into the house-flipping show propaganda of the one week flip.
Chances are, it’s going to take you longer to get a rental property in order, especially as you learn this investment strategy from the ground up. It’ll take time and circumstance to get good. You can increase this learning curve by reading and studying books, blogs, videos and networking with other like-minded people including local meet-ups and terrific online resources, such as Linkedin.
Taking time to complete due diligence not only on the investment strategy as a whole, but each investment individually is vital. I also like the thought of learning through various different avenues, some of which I mentioned in the previous paragraph. But don’t let this distract you from taking it upon yourself to learn. It’s important to constantly evaluate yourself and where your strengths and weaknesses are in your strategy. This isn’t necessarily just so you can improve upon your weaknesses, but also so you can confidently determine where your personal strengths lie.
You’ll also have to be comfortable with “paralysis by analysis”. What am I talking about? Well, too much study could lead you to not ever feeling comfortable pulling the trigger. If that’s the case, maybe this type of hands-on investing is not for you and your focus should go elsewhere— which is fine. Even if you still like this asset class, you can always invest in a SFR REIT!
But if you’re diligent and you put in your work, you can expect to learn a lot, which is great for personal growth and hopefully a high probability of a good return… or better. And over time, you can create a nice portfolio of single-family home rental investments to add to your overall investment portfolio that probably includes stocks and bonds, while feeling a greater sense of control and achievement with the part you built yourself!
Also, by taking a longer-term approach you can blend all of this work in with your current lifestyle and other commitments. Lastly and perhaps most important, by taking a long-term approach you will surely be able to take advantage of market opportunities throughout cycle changes that you otherwise may not have been able to have your resources (cash) been used up by spazzing out the gate.
The single-family rental home industry currently clocks in at about $3 trillion. And with over 1 million homes trading every year, the investment opportunities are bountiful, lucrative, and less-complicated than ever. Get after it!