A strong case is made that the best investment property for beginners as well as seasoned investors is a residential, single-family rental (SFR).
Single-family homes tend to attract longer-term renters and typically superior tenants who pay their rent on time and take better care of the property. Additionally, turnover is typically lower than with apartments, landlords don’t have common-area maintenance costs and the asset’s value has meaningful upside compared to apartments.
That said, savvy investors agree, “Investing in single family rental homes is as much art as science”. However, there are six critical checklist items that will positively move the needle and mitigate the “art of the deal” in favor of selection criteria that are time-proven to increase your odds of success. So whether you are considering your initial toe-in-the-water SFR or expanding your existing portfolio, here are six pointers to keep top of mind.
While properties that fail to exhibit all of the following need not be excluded as an investment candidate, the closer to the optimal profile the better.
First, it is large enough to accommodate a family with one to four children comfortably. For a couple just starting out, it offers adequate space for an in-home office and spare bedroom. And with our increasingly aging population there is value for families that will have older parents to care for in their home.
You are an investor! So act like one!
You are not buying a home to suit the needs, desires, location and amenities for you and your family.
What it comes down to is the numbers … numbers that will likely generate positive cash flow to you, the investor. Your job is to get comfortable with the matrix of purchase price, anticipated up-front ready-to-rent renovations, expected rental income and neighborhood as a market center to attract quality tenants.
Never Bet on the Come
“Betting on the Come” is a gambling expression and means you don’t have what you want or need, now; but, you are betting (or hoping) you will have what you want later in the game. In the world of SFR investing, the come-bet is hope that the rental home value and rents will escalate over time to deliver your ROI (return on investment).
Remember … you are an investor, not a gambler. Your investment must be based on the likelihood of positive cash flow beginning with your first tenant … not the vagaries of future market conditions.
Your business is that of being a landlord. That means paying attention to what’s necessary to protect the value of your SFR investment as well as best ensure positive cash flow. So as in any business, you must budget. The important elements of your budget will include:
Prudence is the byword here … meaning proactive planning rather than reactively responding to events that, given prior thought, can be anticipated and budgeted for.
OK … admittedly a time-worn expression in the world of real estate investing. That said, be particularly mindful of the location of your prospective SFR investment property. That means a micro assessment of the particular neighborhood where you are contemplating your investment, not a macro evaluation based on the region or city. Of the things to evaluate, consider these:
Be sure to do your homework and not rely on data that has little or no application to the specific area you are considering for your SFR investment.
You’ll Need Backup and Help
Even if your sole profession is that of a landlord, it is highly unlikely that you will be willing or able to handle the myriad of day-to-day upkeep, maintenance and emergency repairs that are inherent in SFR investing. The best defense is a strong offense. Take steps to align yourself with capable handymen and tradesmen with proven track records of response-time, quality of work and affordable pricing.
Rents are on the rise and SFR values continue to appreciate. That’s coupled with growing demand on the part of the two largest pools of renters, Millennials and Boomers, for quality single family rentals. The former pool of tenants is starting families and the latter prefer the privacy of an SFR without the hassle of ownership. So opportunities abound for both newbies and seasoned investors. Success will be preceded by caution and attention to detail by prudent SFR investors.