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 is generally uncorrelated to the stock market, meaning they don’t move in concert with each other. For this reason, single-family rentals may be considered a defensive play for investors who have a more pessimistic outlook for the stock market.
At all times, and especially during the coronavirus pandemic, SFR investors must be aware of tenants’ rights. The CARES Act addresses evictions for nonpayment of rents on properties that are financed by government-backed mortgages. Under the federal moratorium in the CARES Act and many state and local eviction moratoria, it is illegal to evict someone for not paying rent.
As an investor in a single-family property, you need to know who owns your loan and any federal, state and local ordinances and regulations that may impact your investment.
Real estate investing is a long-term, wealth-building strategy. Be prepared and patient in selecting the right property, tenants and partners to manage your SFR investment. You can strengthen your portfolio by acquiring single-family rentals. This asset class has historically been less volatile than stocks and bonds and can generate monthly income. With the stock market as volatile as it is, it can be comforting to know a portion of your portfolio consists of a tangible investment that’s largely uncorrelated to the equity market.
