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Single-Family

Should You Invest in Single-Family Rentals in 2020?

As Americans consider the need for more space, demand for single-family rentals will likely remain strong. Real estate investing requires capital, patience and discipline. It is a sound way to build wealth, but it is not for the faint of heart. Capital Capital is needed both to make the initial investment in a single-family property and to maintain it.  Are you planning to purchase a property outright or to finance it? Will you pay the taxes and insurance on your own, or will it be included in your monthly mortgage payment? The upfront investment required to purchase a single-family home can be significant, despite the infomercials and seminars that claim otherwise. Patience Patience is a must when investing in single-family rentals. Selecting a property, vetting it, screening tenants and engaging the vendors needed to manage the property requires time and careful analysis. Will you be the landlord, or will you engage a property manager to collect rents, field inquiries and so on? Who will maintain the property? Even if you are “handy,” you will need licensed contractors (e.g., plumber, electrician, and a handyman) to address issues that arise with the home. Having a team of trusted partners to manage your rental is essential to ensure positive cash flow. Discipline Discipline is necessary in all investing, but it is paramount when you invest in real estate. With the current strong and appreciating real estate market, will you be tempted to sell if your property appreciates significantly in a short period? Be clear about your investment timeline. Buy and hold in order to realize gains over a period of time. Despite what you hear, real estate is generally not a volatile market. Housing is a sound investment when expectations are realistic. If you cannot afford to have funds tied up in an illiquid asset for several years, real estate is not for you. Owners of single-family rentals need to be disciplined about maintenance too. The last thing any neighbor wants is to live next to a rental property that is not well-kept. If you purchase a property with a yard and landscaping, pay professionals to maintain it. Do not expect your tenants to do so. Know the age of the plumbing and HVAC systems and appliances. Be prepared to replace inefficient or mature systems. It’s always better to be aware of investments that are needed than to respond to an emergency about a mechanical failure. Reinvesting the funds you earn in this way requires discipline, but you are ensuring happier tenants and lower rental turnover rates, potential investment write offs for reinvestment and positive cash flow. If you decide to sell before the property is profitable, you will be able to declare reinvestments as a carry-over loss at sale. Driving Rental Demand Demand for single-family homes is very strong. According to the National Association of Realtors, sales of previously owned homes hit the highest rate since December 2006, surging nearly 25% in July. Nearly 31 million people—or 9.8% of the population—moved in 2019, according to the U.S. Census. In 2020, during the coronavirus pandemic, people have been leaving cities as they question whether it is necessary to reside in expensive metro areas such as New York and San Francisco. After being allowed to work remotely for the last several months, many employees are asking for permission to relocate out of state, seeking more space at a lower cost. Multigenerational households are becoming more common, as the U.S. population ages. As citizens reconsider their location, most do not initially purchase a home. Instead, they rent so they can acclimate to their new locale. Affordability and supply of single-family homes is a challenge for homebuyers. Many Americans chose to rent simply because homeownership is not within their reach, given current circumstances. With COVID-19’s economic impact, potential buyers who suffered unemployment will be on the sidelines for a while. In 2019, more than 45 million people resided in rented single-family homes, almost 40% of the population. As of March 2020, 215.23 million single-family units existed, compared to 38.58 million multifamily units, according to Statisica. Single-family housing units have steadily increased since the beginning of the 21st century and likely will continue to do so. Demand will continue to increase as households form, and as those who are aging downsize. Investing Potential Single-family rental properties are attractive for both income and appreciation potential. Individual investors should consider a rental property a long-term investment. Yes, there are fix-and-flippers who purchase and rehab a property, hopefully for a profit, within a short time. Single-family rentals, however, are retained as an asset, and the rents are used to maintain the property and pay the mortgage, if applicable. A real estate investor should choose a single-family rental property that has positive cash flow as well as potential for appreciation. Consider the following as well. Do you want to invest where you live, or in another market? Evaluate the current and future demand for a neighborhood and its appreciation potential. Suburbs with well-rated schools, low crime rates, access to amenities, transportation and short commute to commercial areas are important to consider. Once you have determined your location and property type, how do you plan to finance the property? Single-family rental investments allow investors to diversify their portfolios and mitigate risk, but the upfront cost can be substantial.  Rates are higher for investment properties than for a primary residence, but with interest rates at historic lows, it is an opportune time to consider adding a rental property to your investment portfolio. Financing for single-family rental is often done through private lenders. Borrowing can enhance your return on the rental property because you do not need to invest the entire purchase price of the property up front. If you can find a property that does not require significant work and can rent it above your mortgage to create positive cash flow, that’s a win-win. Returns on single-family rentals are similar to the stock market, but with significantly less volatility. The housing market

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Trends in Interior Paint

Just in time for fall—out with the warm and in with the cool! In today’s real estate market, there is a trend that many sellers are overlooking. It is one of the most basic and cost-effective ways to increase the values of their homes—interior paint. What the studies are saying about millennial homebuyers as it pertains to preferences in real estate are true. Millennials are not looking to put sweat equity into their homes. They are looking for something move-in ready. End of story. Millennial homebuyers do not have the slightest desire to paint even one room, much less an entire house. Millennials are continuing to flood the market for both rentals and purchases, and they are willing to pay a premium for homes whose previous owners have made wise paint choices. Cool is Cool Cool light colors (greens and blues) can brighten a space that may have limited natural lighting—or even make a smaller room feel larger. The trend toward cool doesn’t stop at the cool light colors; the experts are projecting a big comeback in bolder cool colors too. According to HGTV’s Trend Forecast: 2020 Colors of the Year, Classic Blue was voted their color of the year. And millennials love all things HGTV. This is what Pantone has to say: “We are living in a time that requires trust and faith. It is this kind of constancy and confidence that is expressed by Pantone 19-4052 Classic Blue, a solid and dependable blue hue we can always rely on.” In these historic times, who couldn’t use a color that is reflective and tranquil? Not Just for Walls The use of bold or light colors that venture off the “neutral” path of the past 10 years does not just stop at full wall paint either. A good rule of thumb is to choose a color two shades darker than the other walls in the room. Bold, cool colors can be used for an accent wall or trey ceiling to create an accent island for a bold contrast in an otherwise boring kitchen. Or, consider painting bottom or upper cabinets a bold or cool color paired with a neutral white or light gray. You can also paint a tired old bathroom vanity and mirrors. Jazz up the exterior of your home by painting your garage doors, front door and shutters—or a combination. In the end, not only does a fresh coat of paint have the potential to make the room look and feel new, it can easily increase your demographic, foot traffic and the price a buyer is willing to pay for your home.  

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Single Family Rentals Have Come Into Their Own

What opportunities lie ahead? For the real estate market, the pandemic has revealed underlying weaknesses in some otherwise dependable investments and surprising strength in others. The single-family rental (SFR) market, in particular, has proven to be exceptionally resilient. Cautious Optimism in April As the COVID-19 crisis dawned, industry participants were cautiously optimistic during their first quarter earnings calls. Rent collections in March were better than many had expected, with April trending positively, in some cases north of 95% of originally scheduled rent collected. By May, consensus was that the market was buoyed by the unusual circumstances. With much of the country under lockdowns and “stay-at-home” orders, people were looking for socially distant alternatives to apartment living.Others needed more space so they could work from home. Like any industry, the SFR market was braced for short-term pain, but these and other factors were enabling the SFR market to withstand the COVID-19 headwinds. The question remained, “Would it last?”  Today, the answer is an overwhelming “yes.” Applications for rental leases are continuing to break year-over-year internal records, and rent collections are even stronger now than they were at the outset of the pandemic. Clearly, there must have been something right about these rental properties because people are continuing to seek them out. And investors are taking notice. Since the beginning of the year, there have been six new SFR securitizations, four of which have closed or come to market with industry acceptance since the beginning of the COVID-19 crisis. In an uncertain world, SFRs appear to be a haven in the real estate market. More importantly, SFRs have proven their resiliency to become a stable and mature asset class suitable for long-term investors. Why the Continued Boom? The strength of the market cannot be attributed solely to public sector action in the wake of the pandemic. In April, there were no checks from the government or protection for renters from eviction. Instead, SFRs have been benefiting from a persistent imbalance between the stagnant supply and mounting demand for homes. Despite the recent spike in unemployment due to the pandemic, the job market, in the wake of the 2008 great financial crisis grew to levels that had outstripped new housing starts. In 2019, there were 2.1 million new jobs created in the country and only 1.2 million new homes built. At the same time, according to Gary Berman of Tricon Residential, “the pandemic is driving people to prioritize health and working from home, preferably in the suburbs.” Invitation Homes did just that and found that about 30% of survey respondents who moved into homes in April and May did so from denser urban areas, and approximately 30% said COVID-19 increased their desire to live in a single-family home versus an apartment or a town home.  SFRs Are an Asset Class The strength and resilience of the market is making investors reconsider SFRs, not as a lucrative trade, but as a safe and rapidly maturing asset class in its own right. And because the SFR market has weathered the pandemic stress test better than nearly every other real estate asset class, it makes sense that money in search of safety and long-term potential is now flowing in. Part of the maturing process is that institutional owners have become highly effective landlords and property managers. The money that has been flowing into the market has been put to good use to build the sophisticated back office infrastructure necessary to manage hundreds and thousands of properties across multiple geographies. Tenants are taking notice. They appreciate that with an institutional landlord they should expect repairs to be made quickly and professionally, spaces will be clean and decontaminated of COVID-19, and there is far less chance the owners will go bankrupt.  As a result, large institutional owners are getting larger. Invitation Homes now manages upward of 85,000 properties. Another major SFR market player has said its ambition is to manage a half million homes. And why not?   As massive as that figure is, it’s not as eye-popping as it seemed even last year. After all, with 17 million rental properties available in the U.S., and the market growing with strong tailwinds, it’s not unreasonable to imagine an institution with 1 million or even 2 million properties under management. There is nothing holding the market back, and it seems the only thing that could trip up the big players in the market is a misstep of their own making.  Long Past the Financial Crisis The world is a very different place now than it was during the financial crisis of 2008. Then, the housing market collapsed under the weight of massive oversupply anda drought of credit. Savvy and courageous investors stepped into this unforgiving landscape and bought properties with the hope that the market would one day clear. By the time Invitation Homes was founded in 2013 plenty of opportunities to buy overlooked properties remained. In fact, companies like Invitation Homes and others were instrumental in stabilizing the housing market and making it strong enough to withstand another 2008 downturn. Five months into the COVID-19 crisis, we have not experienced the equivalent real estate catastrophe that followed the 2008 financial crisis; however, there are some clouds on the horizon. For instance, what happens when the Federal Housing Finance Agency (FHFA) foreclosure and eviction moratorium expires? Could that spark a cascading crisis as in 2008?  Thanks to the strength of the SFR market, there is now a powerful institutional backstop and plenty of new knowledge and capability available to buy, rehab and rent distressed properties. Where Do We Go from Here? If there was any overlooked value left in the market at the beginning of 2020, the COVID-19 crisis has cleared it and then some, leaving the industry at an interesting inflection point. It’s become a difficult time to be a buyer. The players who built this industry with an aggressive buy strategy now face a challenge of deciding which markets, if any, are the right places to buy

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3 Reliable Sources of Information in an Age of Media Bias

The truth about the markets is still out there if you know where to look. Sadly, one of the most significant trends of 2020 will likely fall by the wayside for most people. It will not be discussed on the evening news, and it will not be the subject of dinner-table conversations in the average home. However, this trend has the potential to be devastating for real estate investors and real estate professionals who remain unaware of it. This potentially devastating trend is the plethora of unreliable and biased data that’s overwhelming nearly every industry sector. For a real estate investor, unreliable data is an anathema. Sadly, one of the worst things that has resulted (in large part) from the COVID-19 pandemic is that everything in our lives today is highly politicized—including our health, our basic demographic data and our approach to business. In a world where the decision to wear or not wear a mask has become a partisan statement and medical data is wielded like a weapon instead of the valuable research tool that is should be, real estate investors are hard-pressed to find market data that hasn’t been twisted and distorted. Investing wisely relies on your ability to conduct effective and accurate due diligence. Fortunately for our industry, there are a still a few familiar standbys that are extremely hard to distort. Data that does not lie is still accessible if an investor knows where to look. Let’s take a look at three of my favorite market metrics. Key Market Metrics 1)  Inventory Levels. There are many ways to interpret housing inventory levels, but the actual number of houses available is pretty hard to distort. Most investors have historically steered clear of observations that markets with limited inventory (i.e., “unhealthy” inventories) are too hot and that markets with large volumes of inventory (i.e., “soft” inventories) are too cold. After all, the key to a hot or cold market relies entirely on your investing strategy and how you source your leads. The market that is hot for a fix-and-flip investor may not necessarily be the same market that is hot for an Airbnb investor, although they certainly can be. To analyze how a market’s inventory affects you, first find out what the inventory is. Find out what types of properties are in short supply, and then apply that information to your strategy or product. For example, in the areas of Indiana that are within about a 90-minute radius of Chicago, there is a serious shortage of single-family rental properties. In fact, these communities are experiencing huge demand for these types of properties because many people have realized that remote working is going to be an option and they no longer want to live in the close quarters of a metropolitan area. If you invest in single-family rentals or you fix-and-flip in the middle tier of affordability for housing in this type of area, then the Midwest inventory data indicates this could be a great location for you. 2)  Building Permits. In states and regions that are proving to be pandemic-insulated or somewhat pandemic-resistant, building permits are still on the rise. If you are wondering about the underlying health of a market, peek into the building permit records. In Georgia, for example, building permits are still up. It is no coincidence that this state also classified construction as an “essential service.” 3)  Days on Market. Days on market is a classic indicator that most real estate investors already use to evaluate the viability of fix-and-flip deals. After all, when you are estimating the timeline for a project, you need to know how long you should expect to hold that property once the work is complete. However, every residential real estate investor should be looking at this metric today because it provides an indication of how much demand there is for housing in general in the market. Do not just look at properties that are comparable to yours either. To get an idea of overall market health, look across the spectrum to see what other types of properties and the populations that reside in them are doing. Be a Leader Your ability to read the markets, pivot when necessary and make responsible decisions with your own capital and the capital entrusted to you is crucial to your success in 2020 and beyond. Successful real estate investors have always placed a premium on being able to do good due diligence with sound data. In this one way, at least, nothing has changed.  

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Adding Value on a Budget

Don’t overlook the smaller, lower-cost items that can add interest and value to your renovation. The purpose of all home renovations is to add value to a property—while adhering to some form of a budget. That’s even more true with investment related to renovations. Adding value within a budget plays a large role in the success of the venture. When planning a renovation of an investment property, many investors focus solely on the big-ticket items as they try to add value or cut costs. Although it’s true that cabinetry, windows, doors and so on all have an immense impact on the budget and marketability of a home, the ability to add value and savings does not have to stop with those items. Smaller details can add up and generate significant buyer attention as well as reduce costs in some instances. When planning your project, some basic considerations that can help you achieve both value and savings are knowing your materials, being open to change and thinking outside of the (BIG) box. Know Your Materials Most individuals in this industry already have a good understanding of construction materials and basic costs. Still, it is good practice to occasionally wander the aisles at the home improvement stores or scroll through some websites to see if there are any opportunities to increase quality while reducing costs. For example, in one instance, a trip to a home improvement store led to the rediscovery of faux-decora outlet wall plates. Now, for someone in new construction, they wouldn’t serve much of a purpose. For low-budget rehabs, however, they are perfect! They are essentially a full cover that completely hide the existing outlet, and they have holes for the plug prongs to pass through the plate into the existing outlet. The cover is designed to look identical to a standard decora outlet/plate. These plates cost about $2.25 each, which is 20% less than a basic decora outlet and wall plate combo. But the real savings comes with not having to pay for labor to replace the outlets. Most rehabs will be repainted, so simply having your painter reinstall these wall plates instead of the old ones reduces your labor cost on the outlets to zero. Being Open to Change Being open to change refers to the idea that every rehab does not have to have gray walls with white cabinets and white subway tile. If the demographic allows, adding a few low-budget, but interesting, design points can make your house stand out from the rest. You’ll have minimal added investment, and in some cases, actually reduce costs. A good example that supports this idea is an alternative to traditional door and window casing. Instead of using a standard 2 ¼” colonial casing, consider using 3 ½” radius edge MDF. It has a simple craftsman design but makes the trim stand out more than the colonial (especially in listing photos). It is wider than a standard casing, which hides any caulk lines from old trim that has been removed. And, it’s cheaper! The MDF can be had for about $0.63 a linear foot; the colonial casing runs $0.80 a linear foot (as priced using nondiscounted pricing from a big box website). In this case, that’s a 21% material cost reduction. Thinking Outside the Big Box Big box stores are great for convenience. You can get most of your material under one roof, and there is at least one in virtually every town. Sometimes, though, just because you can get it at a big box store does not mean you have to. Take vanity mirrors for example. An in-stock framed mirror at the big box store will cost $50 or more and is as basic as basic can get. It may take a few extra minutes out of your day, but your local home goods store will provide an entire aisle of trendy mirrors in various sizes that will single-handedly upgrade the bathroom from generic to fashionable. These mirrors start at $29, or about 40% less than the big box mirror. Again, small savings add up, and you are getting a superior finished product. Ultimately, making one minor change will not have much impact on the overall results of your project. Collectively, though, several minor changes add interest and reduce costs. And they may add just enough value to persuade buyers to choose your house over another or keep the project from going over budget.

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How the COVID-19 Crisis Continues to Impact Real Estate Investors

The economy is open, but that doesn’t mean we’re “back to normal.” Things have changed dramatically for real estate investors since the start of 2020. In January, real estate investors were still shaking hands with everyone at seminars, slapping each other’s backs at networking events and doing everything they could to “get out there” in competitive housing markets around the country. Now, just six months later, investors are bumping elbows or simply nodding a greeting from six feet (or more) away from each other. The seminars and masterminds have come to a screeching halt, for the most part, although the economy is beginning to reopen. The term “reopened economy” is pervasive these days. But what does it really mean? As with so many things in both real estate and the world right now, the nomenclature changes wildly from state to state, market to market and speaker to speaker. For real estate investors, the reopened economy means some major shifts in historical norms are heading our way. For investors who are watching for these changes, accept there is a “new normal” headed our way and are prepared to act, the second half of 2020 could be one of unprecedented opportunity. Contrarian Movements Aren’t Just Political Anymore We all know “that guy” on social media who says the opposite of what everyone else says just for the likes, comments and outrage it creates. These contrarians are particularly prevalent in the political arena, and objective investors tend to ignore them because they are usually almost all bark with very little bite. In the wake of the COVID-19 shutdowns, a physical contrarian movement is gaining steam. These days, you need to watch the actual movement that accompanies surprising consumer preferences to see whether people are simply “talking the talk” about making major life changes that will affect housing in their markets, or whether they are listing their houses and “walking the walk,” so to speak. For example, for the past 10 years, the general population has had a distinct preference for urban housing markets. We have seen strong demand for walkable neighborhoods, multiuse developments and more affordable urban living options. Young professionals have been overwhelmingly willing to delay homeownership, marriage and children in favor of renting with roommates in centralized locations with access to jobs, entertainment and public transportation. Now, however, those preferences have reversed. Entrenched populations in New York City, San Francisco and many other coastal cities are moving toward the outer edges of city suburbs or toward the Midwest and Southeast. This movement is a result of many factors. Among the biggest are: Remote working Health concerns Safety concerns Housing affordability When the coronavirus sent all of us into remote-working mode, it did more than give parents a new appreciation of their children’ teachers. It helped employees and companies realize that remote working on a large scale is truly an option. Although many homeowners and renters might not be willing to commute 90 minutes to work each day, the idea of making that drive once a week or a couple of times a month is not nearly so terrible. Further, since housing prices have not slumped in the way many analysts predicted they would this spring, housing affordability in the Southeast, Midwest and more rural areas of the country creates a compelling case to move for individuals no longer interested in the amenities and advantages of living in the city center. Rental Preferences Are Shifting One of the biggest short-term results many investors are seeing from this movement away from big cities is that rental preferences are shifting. Single-family rental owners are finding their product, always a strong asset as a long-term cash-flowing strategy, are in higher demand than they have been in about a decade. The outflow of residents in metropolitan multifamily units looking for suburban or even rural single-family options is driving the demand. Multifamily investors at the extreme high and low ends of the spectrum, on the other hand, are struggling, as luxury tenants literally move to greener pastures, and vulnerable renters find themselves unable to pay rent and unlikely to be evicted, at least at the present time. This shift in renter preferences is creating strong opportunities for real estate investors in both single- and multifamily residential real estate.If you have been wishing you could get involved on the multifamily fix-and-hold side via a syndication or other group project, now is likely a great time to do so at lower entry levels. On the other hand, if you already hold single-family rentals in your portfolio or want to add more of them, then now is the time to acquire properties in those trending areas where residents have started looking. Pay Attention and Optimize Everything With residential preferences changing so quickly, it’s important for real estate investors to remain actively engaged in tracking these trends and, furthermore, in optimizing their portfolios. Investors must watch market rent rates because they are not, as the “talking heads” might have you believe, falling. In fact, in most B Class and C Class neighborhoods, home values and market rents are rising. It is important not to let the COVID-19 pandemic convince you that nothing is going on and you should just be happy if you are collecting anything. The reality is that this is a time of growth in many areas and sectors of the country. Do not let that growth leave you and your real estate portfolio behind.

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