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.
SFR – Preferred Profile
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.
- 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. 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.
- 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 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 single-family 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.
Don’t Fall in Love with Your Idea of an Ideal Deal
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.
You Are 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 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:
- Upkeep
- Vacancy expense
- Major capital expense
- Emergency contingency fund
Prudence is the byword here … meaning proactive planning rather than reactively responding to events that, given prior thought, can be anticipated and budgeted for.
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 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:
- Schools
- Transportation
- 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 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.
Takeaways
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.