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Investing In Single Family Rental Homes By Winston Rowe and Associates
Single-family rental homes comprise more than one-third of all U.S. rental properties, about 16 million currently, with another 13 million new rental households expected to be formed by 2030.
By: Winston Rowe & Associates
The rental income fewer 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 to get a nice double-digit overall return on your equity over an extended holding period.
Purchasing and owning a single-family rental home is simpler than you might imagine.
Here are five tips to get you started:
1. Know your investing criteria first
With any investment, be it stocks, bonds or real estate, you 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 in a good school district.
You're going to 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.
2. Don't limit your investment property search to where you live
Consider this: If you lived in Atlanta, you wouldn't buy Coca-Cola stock simply be
cause 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 swings of the local economy.
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 — the San Francisco Bay Area, for instance — finding an income property that's cash-flow positive is going to be challenging, to say the least.
You won't be able to find a great income property for $100,000 in Seattle, Denver, or Oakland, Calif., but you can if you focus on the Midwest, South, and Southeast.
3. 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.
Over the past several years, property managers 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 difficult if the property is not nearby.
4. Real estate investing is a marathon, not a sprint
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 single-family rental home investing, which is about building long-term wealth. Instead, treat it like a nest egg.
In addition, 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 several years before you have another vacancy.
Look at this investment over a multi-year horizon and consider your overall outlays and inflows over 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.
5. Take advantage of the tools and resources available to you
The single-family rental home industry currently totals $3 trillion, with 1 million homes trading hands among investors every year.
The investment opportunities are ripe, and never has it been less complicated for investors to buy and own homes outside their geographic location.
Winston Rowe and Associates published this article.
They are publishers of Free eBooks and experts in the consulting for commercial real estate finance and business transaction.
They can be contacted at 248-246-2243 or visit them on line at http://www.winstonrowe.com