In last month’s newsletter, we touted the potential for SFH rental opportunities in light of the lowest mortgage interest rates in 5 decades. Coupled with this historic dip in rates is our projection that there will be a diminished market for homebuyers given the current financial upset due to the COVID-19 pandemic … thereby maintaining pools of SFH tenants by choice or by circumstance.
This scenario may trigger an enhanced opportunity for residential real estate investors … especially those who have or seek to acquire SFH rental properties. A strong case is made that the best residential rental investment property for beginners, as well as seasoned investors, is a single-family home.
Single-family homes tend to attract longer-term renters as well as superior quality tenants who pay their rent on time and take better care of the property. Additionally, turnover is typically lower than with apartments, plus landlords don’t have common-area maintenance costs. As a further upside, growth in SFH asset values tend to be superior compared to apartments.
That said, savvy investors agree, “Investing in single family rental homes is as much art as science”. However, there are six key 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.
As promised in our last issue … whether you are an initial toe-in-the-water investor, or expanding your existing portfolio, here are six pointers to keep top-of-mind.
SFH – Preferred Profile
While properties that fail to exhibit all the following need not be excluded as an investment candidate, the closer to the optimal profile the better.
- A 3-bedroom home with 1½ - 2 baths casts the widest net in attracting renters. Why?
First, it is large enough to accommodate a family with one to four children comfortably. Depending on the number of family members, it also offers adequate space for an in-home office. Note: Post C-19 this is likely to be a strong “plus” as telecommuting is likely to become more prevalent.
Additionally, with our increasingly aging population, many families will perceive value in having a spare bedroom to care for older parents in their home.
- Next, a rancher is preferable to a two-story home. Renters tend to go for the convenience of a one-floor plan. Investors benefit from easier maintenance as plumbing and wiring is all on one floor. Additionally, there is no wear and tear of stairways leading to a second floor.
- Now, when you’ve located that ranch house, be particularly pleased if it is brick. Again, a low maintenance plus - as expensive siding, periodic repainting and repair of external trim are not issues.
- Once more revisiting the ideal SFH rental profile, minimize the need for landscaping upkeep and renewal by seeking a smaller lot. That is attractive to you as the investor to minimize yard maintenance services. Additionally, it appeals to tenants willing to undertake the responsibility for upkeep, but only if the effort is relatively painless.
- Moving topside at our optimal SFH investment property portrait. Composite shingle roof, please! It will last longer and require less maintenance than alternatives.
- When renters view heating, cooling and cooking options … all-electric wins the vote as being cheaper and therefore more desirable than gas.
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. Your objective is to acquire a property that will generate positive cash flow to you, the investor. So, 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.
Hope Is Not an SFH Investment Strategy
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. A strategy based on hope is that the rental home value and rents will escalate over time to deliver your ROI (return on investment) down the road. Don’t bet on it!
You’re In Business for Yourself
Your business is that of being a landlord. That means paying attention to what’s necessary to protect the value of your SFH 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:
- Vacancy expense
- Major capital expense
- Emergency contingency fund
Prudence is the byword here! Proactively plan for events that you may reasonably anticipate will surface. You’ll avoid the alternative … reactively responding to surprises.
Location, Location, Location
OK … admittedly a time-worn expression in the world of real estate investing. That said, be particularly mindful of the location of your prospective SFH investment property. That means a micro assessment of the neighborhood where you are contemplating your investment, not a macro evaluation based on the region or city. Of the things to evaluate, consider these:
- Job growth
- Proximity to jobs
- Application of local, state and federal regulations
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 SFH 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 SFH investing.
If you choose a DIY option, take steps to align yourself with capable handymen and tradesmen with proven track records of response-time, quality of work and affordable pricing.
Alternatively, KRS Holdings stands ready to help.
Single-Family Home Investors – Current & Planning to Be … for sure, ask Mary Shaw about how to relieve your property management burdens … as well as help with research to identify and procure quality SFH property.