There’s no time like right now to diversify your investment portfolio by adding real estate. If you’re currently vetting alternatives, it’s worth taking a look at single-family rentals—an asset class that comprises more than one-third of all U.S. rental properties.
Quick takeaways from this article:
- Demand for single-family rentals is at an all-time high
- Know your investing criteria first
- Don't limit your investment property search to where you live
- Separate investing from operations
- Treat your investment like a nest egg
- Leverage the increasing amount of new tools and resources available to rental property investors
The single-family rental industry: A quick primer
Demand for single-family rentals is at an all-time high and showing no signs of slowing down. The U.S. went from about 12 million rental homes pre-Great Recession to about 16 million today, and 13 million new rental households are expected to be formed by 2030. Since we are not adding new housing stock to keep up with this future demand, the sector should have significant wind at its back given these favorable supply/demand trends.
There are many attractive characteristics to the single-family rental asset class. For starters, returns have historically moved independently from the stock market, meaning they lack correlation. In fact, data compiled by my company Roofstock found single-family home prices and stock prices are almost perfectly uncorrelated. This means the ups and downs of the stock market have almost no direct impact on home prices, which tend to change in value more slowly and be influenced by numerous factors such as the strength of the local economy and amount of supply added.
If you’re a newcomer to SFR investing, one way to think about it is like an inflation-adjusting bond with an equity kicker. The rental income less operating expenses generates current distributions—like the coupon on a bond—and rents can be adjusted annually, providing inflation protection. Finally, the equity “kicker” comes in the form of building wealth as your tenant pays down your mortgage for you while the property can grow in value over time. It’s entirely possible you can get a nice double digit overall return on your equity over an extended hold period.
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Purchasing and owning a single-family rental home is also a lot more doable than you might imagine. Here are five helpful tips to get you started off on the right foot.
1. Know your investing criteria first
With any investment, be it stocks, bonds or real estate, you really need to know what your objectives are. If you’re focused on safety and security, consider exploring low-risk investment homes that generate steady, reliable yield. An example of this may be a more expensive investment property (think $150-$250K) in a good school district. You’re going to get a lower yield, but on the flip side you may see better downside protection and less volatility. If you have more of a long-term horizon or you’re seeking higher returns, you may want to take on a little more risk. Oftentimes, lower-priced homes will be a little bit more risky, but you may get higher yields and potentially higher long-term returns.
2. Don’t limit your investment property search to where you live
Here’s one way to think about this: If you lived in Atlanta, you wouldn’t just buy Coca-Cola stock simply because its headquarters are local. The same principle applies to real estate investing. If your primary residence, income property and job are all located in the same area, you have a lot of concentrated risk and are more vulnerable to the ups and downs of the local economy.
At my company Roofstock, an online marketplace for buying and selling leased single-family rental homes, we like to encourage people to spread out risk by investing in markets uncorrelated to where they live. (Side note: Having a property manager is key in this equation. That’s why Roofstock sets all of its investors up with certified local property managers).
Diversification is just one reason to expand your investment property search footprint. Another is access: If you live in an expensive urban or coastal area with relatively high home prices—the San Francisco Bay Area, for instance—finding an income property that’s cash-flow positive is going to be a bit of a challenge, to say the least. You won’t be able to find a great income property for $100,000 in Seattle, Denver or Oakland, but you can if you set your sights on markets in the Midwest and South, or Southeast.
3. Separate investing from operations
One of the appeals of SFR investing is you can leverage strong local property management firms to handle the day-to-day management tasks of rent collection, repairs and maintenance, and leasing. Over the past several years, property managers have gotten better and better as they have adopted new technologies and business processes to manage homes more effectively for owners.
While some people do choose to self-manage, hiring a property manager can save you a lot of time and potentially money in the long run.
While property management companies typically charge between 7 and 8% of the rent, they manage properties for a living and can work to ensure the property is leased, in good condition, and the tenants are happy. Additionally, using a local property manager effectively allows you to buy properties outside of where you live, as self-managing is very difficult if the property is not close by.
Today, more and more people are becoming remote investors at large. In fact, at Roofstock, the majority of our buyers live more than 1,000 miles away from their rental properties.
>>Related: What does a property manager do for you?
4. Treat your investment like a nest egg
You might be familiar with the house flipping reality TV shows in which a person buys a home, fixes it up, and sells quickly for a profit. While that can be an effective way to make a one-time profit, it’s the exact opposite of how you should approach SFR home investing, which is about building long-term wealth. Instead, treat it like a nest egg.
Furthermore, don’t be overly influenced or reactive to short-term fluctuations in your rental property portfolio. You may own a home for a few months and have to deal with a tenant moving out unexpectedly, but the next tenant might reside there for three or four years before you have another vacancy. Look at this over a multi-year horizon and consider your overall outlays and inflows over that long timespan. If you buy a decent house in a decent area, the returns tend to be quite attractive over time and can add a nice counterbalance to other types of investments.
5. Leverage the tools and resources available to you
New developments in technology and data access are making real estate ownership more broadly accessible to the everyday investor. For example, Roofstock’s real-estate-as-a-service platform enables buyers to confidently purchase leased investment properties without needing to physically see them.
A few other examples of real estate marketplaces that cater to buyers and sellers include Opendoor, OfferPad and Knock. Apps like Cozy, Property Buddy, and RenTracker can help landlords manage and monitor their portfolios anytime, anywhere. Secure and legal e-signing services such as Notarize.com and DocuSign help eliminate the need for “wet” signatures, helping to expedite closing paperwork.
I could go on. The point is, thanks to innovation in software services and data accessibility, never before has the real estate investing process been easier. Leverage these new solutions that are available to you!
Single-family rental homes make up a $4 trillion industry, with 1 million homes trading hands to investors every year. The investment opportunities are ripe, and never has it been more doable for investors to buy and own homes outside their geographic location. It’s the perfect time to dip your toes into the single-family rental market and scratch that real estate itch. So what are you waiting for?