Demand for single-family rentals is at an all-time high and showing no signs of slowing, according to MarketWatch. If you’re a newcomer to single-family rental investing, know that buying and owning a single-family rental home is easier than you might imagine. Here, the financial information website offers four tips to get you started.
Know your investing criteria
With any investment—whether it’s stocks, bonds or real estate—you must 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 in a good school district. You will get a lower yield, but you may see better downside protection and less volatility. If you have a longer-term horizon or you’re seeking higher returns, you may want to take on a little more risk. Often, lower-priced homes will be riskier, but you may get higher yields and potentially higher long-term returns.
Don’t limit your investment property search
If your primary residence, income property and job all are situated in the same area, you have a lot of concentrated risks and are more vulnerable to the swings of the local economy. Spread risk by investing in markets outside of where they live and then hire a local property manager. Diversification is just one reason to expand your investment property search. Another is access: If you live in an expensive urban or coastal area with relatively high home prices, finding an income property that’s cash-flow positive will be challenging.
Separate investing from operations
One of the appeals of investing in single-family rental homes is you can hire strong local property management firms to handle day-to-day management tasks of rent collection, repairs and maintenance, and leasing. During the past several years, property managers have adopted new technologies and business processes to manage homes more effectively for owners. Although 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 percent and 8 percent 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 difficult if the property is not nearby.
Real estate investing is a marathon
Single-family rental home investing is about building long-term wealth, so it should be treated like a nest egg. You also don’t want to 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 several years before you have another vacancy. Look at this investment over a multiyear horizon and consider your overall outlays and inflows during that long time span. 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.