Co-Founder & CEO of PlanOmatic.
The single-family rental market is booming, with more and more investors jumping into the sector. The demand for single-family rental homes is exploding as consumers seek larger homes with more outdoor space, and prices are reaching record highs. Rents for these spaces increased 12.6% year-over-year in January, compared to an increase of 3.9% in January 2021, according to a press release by CoreLogic.
As CEO of PlanOmatic, I provide single-family rental investors and owners with photography, 3-D and floor plans with speed and at scale. However, I recently decided to put my industry knowledge to work and personally invest in single-family rental properties. I launched a single-family rental fund along with 13 other investors, and we have acquired 24 properties to date. As a relatively new single-family rental investor, I’ve learned many important lessons along the way. Here are five tips I encourage individuals to keep in mind if they’re new to single-family rental investing.
Identify your investment criteria.
There are several factors to consider before investing in a single-family rental property. First, it’s important to determine your investment criteria. Are you looking for cash flow or appreciation? Next, determine how much cash you have to invest. And lastly, identify the markets you are familiar with and the ones you want to invest in. Some markets will provide higher appreciation, and some will offer better cash flow and cap rates. Whatever you choose, focus is key. To be successful at the beginning of your investing journey, I recommend focusing on a specific product type and a specific market.
Assess your finances.
You must have an understanding of your financial situation before investing. It’s important to first check your credit score and then determine if you qualify for a loan. Find out how much your bank is able to leverage for you. My rule of thumb is to look at loans with a seven-year amortization schedule because, in my experience, that timeframe will get you through a normal real estate or economic cycle.
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Another consideration when investing in a single-family rental property is whether the property already has leases and/or a tenant in place. Your bank might be more likely to approve you for a loan if there is already a tenant in place, as there is less risk.
Determine markets and properties ripe with potential.
Remember: location, location, location. No matter where you are looking to invest, the location of the property is critical. Properties in good locations typically retain their rental rates and often value far better than those in outlier areas. In addition, a big part of your investment is property taxes, so it’s crucial to look at the cost of property taxes prior to acquisition.
Once you have determined a strong single-family rental investment opportunity, beware of what I call “analysis paralysis.” You are not buying this home to live in it, so you don’t need to overanalyze every aspect of the property as if you would be. When you are investing in these properties, it’s important to look at a few simple factors. What’s the appreciation potential, what does the cash flow look like and what’s the potential for a renovation?
You certainly want to be informed and to do your analysis before the acquisition, but “analysis paralysis” can ultimately slow you down. This is a market that is moving quickly, so you have to be ready to acquire. Try not to get hung up on a couple of percentage points as you answer the questions above, especially if the investment is a longer-term play.
Do your due diligence.
Before acquiring a property, investors should embark on a thorough due diligence process. For instance, I always recommend checking the property’s roof condition, sewer scope and foundation. Examining these three things can help make sure you are not missing anything big when it comes to estimating maintenance expenses. One big expense like that can really devastate a full year’s investment.
Furthermore, when you are under contract to buy a rental property, the title will only go so far as to check for any owed taxes. Check to see if there are any municipality leans and taxes on the property that won’t show up in the title. You could very well be stuck with an unpaid tax bill if you don’t conduct thorough property due diligence.
I also suggest checking regionally and locally to learn if the property has a history of unexpected natural disasters in the area, such as floods, hurricanes, fires and/or tornados. If so, you can make sure you are insured to avoid disastrous expenses due to these types of events.
Check water bills, electricity bills and rent rolls as well, and make sure the rent is reconciled with the bank and actually was deposited.
Last, look to see if anything is expected to be built around the property, as a potential development next door could create a lot of noise, and a tall building, for example, could block your property views.
Determine your property management plan.
Once you have acquired a property, you can consider hiring a trusted and experienced property management company. If this is the route you take, identify a property manager that can onboard quickly, has the same values as you in regard to how you want to treat your tenants and has a process in place.
By working with a trusted property management partner, the investing process can be a lot easier and allow you to invest from anywhere across the country.
The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.