Do you enjoy two-for-one deals or getting the most bang for your buck? Does real estate investing for beginners pique your interest? If so, you should consider investing in rental houses. Having houses to rent can make money in two ways: the appreciation of the house over time and generating rental income, which, according to Federal Reserve Economic Data, has increased about 17% over the past five years.
A Snapshot of Rental Properties
Over the past 15 years, single-family rentals (SFRs) have been the fastest-growing segment of rental housing. Today, they account for more than a third of the nation’s rental housing, some 15-16 million properties. In addition, single-family rental investors account for 15-20% of existing home sales, while “built-to-rent” homes are the hottest trend in new home development. Valued at a total worth of more than $2.3 trillion, SFRs make up 35% of all rental housing around the country.
Add Versatility and Security to Your Portfolio
Rental houses are versatile for just about any type of situation. For example, they’re the perfect solution for young families who plan to buy but can’t afford to; in today’s super hot markets, they’re useful for owners who expect to move soon; retirees who have sold the family home; salespeople who frequently move; and, families that don’t have the credit or the cash for a down payment. Many people also choose single family rentals to live in a good school district or commute to work for a fraction of the cost of buying.
The secrets of these rental properties’ successes are actually quite simple:
- Single-family rentals produce two income streams — rent (active income) and appreciation (passive income).
- You can buy single family rentals with other people’s money. Then, with good credit and low debt, you can finance your single family rental at super-low mortgage rates. Some lenders now specialize in serving SFR investors.
- They add security and stability to investment portfolios that are heavy in stocks and other volatile securities. In addition, single family rentals are more secure and more tangible than securities.
What to Prepare for as an Investor in Rental Housing
Today, you can find all the services you will need to enter single-family rentals investing. You can use them to buy properties, market to potential tenants, find and screen those tenants, and manage tenant relationships. Some companies will even find and manage a SFR for you in a distant market that might be a better place to find rentals than your home market. As a result, you can invest in the hottest markets for SFRs and never leave home. If investing in SFRs is something you’re heavily considering, here’s what you need to know:
Landlording Is a Barrier, But Not as Much as You Might Think
The vast majority of single-family rental owners are “mom and pop” investors who live nearby and save money by managing their property themselves. But, for many others, “landlording” is a definite problem. The specter of nighttime emergency calls to fix the plumbing or an air conditioning failure used to keep investors out of the SFR market.
However, in recent years, a mini-industry of property management companies have been established to serve SFR owners in most markets. These entities use software to handle all the financial aspects, such as rent, escrow, and profitability, and also support marketing for new tenants, seasonal upkeep, maintenance schedules, and tenant screening. Many management companies even contract with local plumbers, landscapers, appliance repair, and HVAC companies to handle emergencies.
You Should Buy Low
An important measure of potential profitability is the capitalization rate, or “cap rate.” The cap rate measures the rate of return you can expect to be generated on a real estate investment property in each market. Expressed as percentages, cap rates are calculated by dividing net operating income by property asset value.
Cap rates help investors find the least expensive houses relative to the potential for appreciation. For this reason, investors typically prefer smaller-sized homes that will appeal to individuals and small families.
Admittedly, today’s soaring home prices and shortages of smaller homes create less favorable conditions to acquire and convert a property into a profitable rental. Many investors are now buying from companies like HomeVestors, that buy houses quickly for cash, saving sellers the cost of brokers’ fees and repair. They also buy from so-called “iBuyers,” a new kind of real estate brokerage that conducts home sales online. Demand for single-family rentals is so strong that many large, institutional SFR landlords have partnered with builders to create “built-to-rent” communities consisting entirely of new single-family rentals.
Millennials Are Currently Driving Demand
Even though conditions are less than ideal to buy single-family rentals, the market for tenants has never been better. Millennials’ homeownership rates trail older generations, as student loan debt and the time it takes to save for a down payment are keeping young families renting. It also goes without saying that the COVID-19 pandemic has made a move to homeownership even harder.
Millions of young families need more space than an apartment provides and are turning to single-family rentals. “We’re seeing demand for single-family rentals significantly increase,” American Homes 4 Rent CEO David Singelyn said recently. “The stimulus for this migration is linked to COVID-19. They’re moving to get away from the high density living and housing that they’re in for safety reasons and social distancing reasons.”
So if you’re looking to maximize your investment into single-family rentals, areas with high population numbers of millennials may help ensure strong interest in your property offerings.
Home Type Could Affect ROI
Single-family rentals can be designated as “attached,” like you’d find in apartments, duplexes, etc., or “detached,” where the property is a single, standalone unit not connected to any others. Depending on which property type you offer, you could see a greater or more diminished return on your investment.
According to CoreLogic, detached property rent growth more than doubled in February 2021 compared with February 2020, rising from 3% to 6.5%. However, that same time period saw attached property rent growth slow to less than one-quarter of overall rent growth in February 2021 compared with February 2020. Attached properties saw just a 0.9% year-over-year increase in February 2021, down from 3% in February 2020.
The Bottom Line
Property investment isn’t for everyone, but it’s also more accessible than you might imagine. If you’re interested in investing, first research your desired market to get a glimpse into how rentals are performing. Meet with a trusted financial advisor or real estate professional to guide your decision, and of course, be prepared to put in the initial work of purchasing and readying your property for tenants.