It looks like the housing market will end the year on solid footing. Sales remain strong, home prices continue to rise due to a shortage of inventory, and rents are seeing near-double digit increases in some real estate markets.
In all likelihood, the residential rental property market in 2021 will remain a great choice for investment. Let’s take a look at how the stars are aligning for real estate investors, and how you can start planning for 2021 today.
A Look Back at 2020
This year is turning out to be pretty good for rental property investors. Before we talk about next year, let’s take a quick look at the most recent Single-Family Rental Investment Trends Report from Arbor:
- Single-family rental (SFR) sector is having its moment due in part to a shortage of supply and the growth in working from home
- Occupancy rates have reached generational highs of 95.3% while rent growth on lease renewals averaged 2.3%
- Rent collections are holding in line with 2019 despite the pandemic and recession
- Cap rates on single-family rental property are 6.5% compared to 11.0% just eight years ago
- Interest rates on SFR mortgages are at historical lows, with loan-to-value ratios (LTVs) a conservative 65.8%
- Build-to-rent is helping to meet the growing demand for SFR rentals, from a single house on a subdivided lot to large-scale community developments of homes for rent
Although 2020 was good for rental real estate, the most successful investors know that past performance is no guarantee of future results. With that in mind, let’s look at some of the best ways to keep your real estate business thriving in 2021.
Best Tips and Practices for 2021
If you want to stay on top of your game and seize the best real estate opportunities, it’s important to plan ahead. Here are some of the best tips and practices to keep your real estate business growing in 2021 and beyond:
1. Develop good habits
Good habits become stronger over time and are important to your success as a real estate investor. Developing the right habits help drive your potential and take you one step closer to financial independence:
- Create business goals every day that contribute to your short- and long-term business plan
- Set aside 30 minutes each day to sync your body and mind to focus on the tasks the lie ahead
- Use the Pareto Principle (80/20 Rule) to scale out your day and scale up your business
- Network and connect with people because real estate is as much about who you know as what you know
- Understand the risks as well as potential rewards of different real estate markets to take action when the time is right
2. Embrace technology
Today’s technology provides tools to help you find the best properties, increase your return on investment, and take your real estate business to the next level:
- Cloudhouse rental calculator to receive a complete forecast of potential return for any single-family home in the U.S. (even if it has never been a rental property before)
- CRS Data for public tax records, owner information, comparables, and area demographics
- Local MLS and Realtor.com for property listed by real estate agents
- RENTCafé and Rentometer to learn what markets rents in your area really are
- Zillow for sale and rental listings, compare home values, and research pricing and rent trends
- Roofstock marketplace to find single-family homes and small multifamily property listed for sale, oftentimes already rented to a tenant
3. Stay organized
Clutter creates a loss of focus, limiting your productivity and making time management far too difficult. Set aside a specific time of day to respond to emails and social media like Twitter and LinkedIn. Then, make the most of the time you’ve saved by using these tools to streamline your real estate business:
- Google Workspace (formerly G Suite) includes free productivity and organization tools such as Docs, Drive, Calendar, and Sheets
- Evernote makes it easy to upload, organize, and save data such as text, pictures, and videos to the cloud using a smartphone or desktop app
- DocuSign lets you upload and send documents for an e-signature instead of depending on snail mail or an expensive courier service
4. Maximize your deductions
Recurring cash flow and long-term appreciation are two key reasons for investing in real estate. In addition to generating passive income, real estate and business deductions can also be used to reduce the amount of income you pay tax on.
Your preferred property manager will provide you with a year-end P&L to be used when preparing your taxes. Depending on your specific situation, there may be other expenses you can start keeping track of today that can increase your deductions even further:
- Home office deduction have specific guidelines but can quickly add up at the end of the year
- Travel deductions for making periodic visits to your remote real estate investments
- Legal and professional services you’ve paid for directly, such as tax planning with your financial advisor or an attorney to set up an LLC or investment partnership
- Closing costs that can be deducted in the year they are incurred such as property tax and insurance
- Depreciation is a non-cash expense used to reduce taxable net income, potentially moving you into a lower personal tax bracket
5. Always be learning
Benjamin Franklin once said that, “An investment in knowledge pays the best interest.” Just like interest paid on a rental property loan, continuing education expenses are usually tax deductible.
Some of the best ways for learning more about real estate investing in 2021 include:
- Real estate investing books such as Long Distance Real Estate Investing and The Millionaire Real Estate Investor
- Podcasts from BiggerPockets that you can listen to online or on your smartphone any time of the day or night
- Blogs on real estate investing from Forbes, Fortune Builders, RealWealth Network, REtipster, and the Roofstock Blog
- Clubs and real estate investing groups such as REIClub, your local chapter of the National Real Estate Investors Association (NREIA), and on LinkedIn, BiggerPockets, or Meetup.com
- One on one coaching and group training programs like the Roofstock Academy help you become successful without having to make dozens of costly mistakes on your own
Single-Family Rental Investing Trends in 2021
While the pandemic will eventually run its course, most experts agree that the crisis has intensified existing trends. Here’s a look at some of the single-family trends to look for in 2021, according to Arbor and Emerging Trends in Real Estate 2021 from PwC and the Urban Land Institute:
Investment prospects for residential property
Single-family homes targeted toward the moderate income and workforce renter have near-excellent best investment prospects. Master-planned communities, manufactured home communities, and single-family homes targeted toward the high-income renter all have above average investment prospects.
SFR housing as a safe haven
Single-family rental property could continue to be a safe haven for both real estate investors and renters. Real estate has traditionally been a way to hedge against inflation while providing a low correlation to the whims of the stock market. For renters, sheltering in place and working from home has given adults more control over their lives and extra time saved by not commuting.
Demographics of baby boomers, millennials, and Gen Z
Baby boomers, millennials, and Generation Z are all driving the demand for rental property in their own unique ways:
- Boomers are a 75 million-strong population, 55 years or older segment looking for comfort, technologies such as purer air and water quality, and ways to stay connected to family and friends.
- Millennials aging into their 30s are becoming more attracted to detached single-family suburban communities even while they delay starting families.
- Gen Zs are entering their 20s and are looking for entry-level rental property that offers functionality and sharper design.
Tracking geographic demand for SFR
Migration trends are continuing to shift from urban areas to the suburbs. Secondary and tertiary markets offer real estate investors and renters more affordable property, a lower cost of living, and a better quality of life overall.
Google Trends and the popularity of the search term “homes for rent” can be an indicator of existing and future demand for single-family rental property. The top 10 metropolitan areas where renters were searching for homes (as of Q3 2020) are:
- Memphis, TN
- Augusta, GA
- Macon, GA
- Columbia, SC
- Dothan, AL
- Florence-Myrtle Beach, SC
- Albany, GA
- Atlanta, GA
- Jacksonville, FL
- Tallahassee, FL
Clearly, there will be plenty of opportunities for remote real estate investing in 2021. Ultimately, your success depends on three things: How well you plan your real estate business, building a real estate team with a local property manager, and finding the best rental houses to generate sustainable recurring cash flow in growing markets.