With rising mortgage rates, turbulent markets, trade war talk and mounting geopolitical tension, investors need to understand the potential impact of the next economic downturn — especially those concerned about volatility.
While it isn’t necessarily time to panic, some investors may be looking for the smartest way to shift their investment portfolios to be positioned to weather the next downturn. As we approach notching the longest economic expansion in recent history, a little defensive thinking could be in order.
We believe the single-family rental (SFR) sector can present a wise alternative when the stock market feels overheated or a recession may be on the horizon. Here are several reasons:
- SFR properties have elements of both potential income and appreciation potential.
- SFR returns historically have been similar to those generated by the stock market, but with less volatility, according to an internal study from Roofstock based on data from the U.S. Census Bureau, as well as S&P 500 returns data and 10-Year Treasury returns data from 1992 to 2017.
- SFR returns are also typically uncorrelated to the stock market, meaning they don’t move in lock-step. For this reason, SFR may be considered a defensive play for investors who might be nervous about the outlook for the stock market.
As investors and money managers explore investment opportunities in the SFR sector, I have outlined three SFR investing strategies for new and experienced investors alike: 1) DIY & buy nearby, 2) buy elsewhere from your easy chair, and 3) set it & forget it.
Whether investors are looking to dip their toes in SFR investing or dive in head first, here are several strategies to consider that fit different investing styles and approaches.
1. DIY & buy nearby
An estimated 70% of rental properties are owned by investors who live within an hour’s drive of the property, according to internal Roofstock data. This local investing approach may allow owners to self-manage the rental, while sometimes scoring a better deal on a “fixer upper” and avoiding a property management fee.
Self-managing may also be prevalent in inherited or “pass down” properties, as the owner can feel a sense of connection to the home itself. This approach to real estate investing may make sense for owners who don’t mind being hands-on in the process, getting their hands dirty, and making decisions about the property.
While this DIY approach has traditionally required time and expertise with property management, the advancement of proptech and the rise of third-party property management tools is removing that barrier to entry and alleviating the pains of management. Another advantage of the “DIY & buy nearby strategy” is that investors gain an increased exposure to, and familiarity with their local real estate market. Owners who live within an hour’s drive (give or take) of their rental are typically more clued-in to the regional economy and cognizant of what the local real estate landscape looks like.
2. Buy elsewhere from your easy chair
Over the last five years, real estate investment platforms and online marketplaces have given investors the confidence and support to invest remotely in single-family rental homes. Proptech companies like Roofstock allow an investor based in Manhattan to buy an SFR in Atlanta or Memphis, for example — and do it all from the comfort of their couch.
At Roofstock, the majority of our real estate investors live more than 1,000 miles away from their properties. Thanks to the availability of data and exciting advancements in real estate tech, investors no longer have to travel out of state, tour the property in person or perform the legwork of finding brokers, contractors, and leasing agents.
Today, online platforms allow investors to explore the rental property from the comfort of their own home, and get important analytics such as offering documents, inspection reports, neighborhood scores and more to back up their decision.
Furthermore, Roofstock streamlines the process by introducing investors to vetted local property managers who handle all the day-to-day tasks of caring for the rental and the tenants. By separating investing from operations, Roofstock enables rental property owners to focus more on optimizing their portfolio, rather than managing it.
3. Set it and forget it
For investors who prefer a more hands-off approach, but still want real estate exposure to generate potential passive income, the “set it and forget it” method may be a strategy to adopt. Investors may be familiar with this traditional model, where investors buy shares in a real estate investment trust (REIT) and enjoy direct exposure to single-family rental homes (without having to do much else).
One of the advantages of buying shares in a REIT is the broad diversification. Possible disadvantages include the correlation to the stock market and potential reliance on market trends. Dividend yield for REITs also tend to be lower due to increased overhead and operating costs, as opposed to buying directly.
As investors hunt for attractive asset classes in a recessionary market, single-family rentals may be a strong alternative to consider. For new and seasoned investors alike, Roofstock radically simplifies the process and makes it easy to purchase or sell single-family rentals 100% online.
Catch Gary's full webinar replay on the state of the real estate market and 2019 investing strategies: