There is no shortage of reasons why investing in residential real estate can be a good idea: home prices declined during the recent financial crisis, the number of renters has skyrocketed, it’s often considered a stable alternative to the stock market and the list goes on and on.
At the same time, residential real estate investing has shifted from a local proposition to one without geographic limitations. That’s because of developments in technology, financing, services and processes that can make it easier for investors to search for opportunities, purchase properties and manage them from afar.
In the past, a long-standing issue with the single-family rental sector has been a weak debt market. Even worse was that these loans are highly dependent on the personal income of the borrower, not the income of the real estate. This limited obtaining attractive financing to only the wealthiest of investors.
A new lending sector has emerged, however, that can provide financing for investors of various sizes and neither limits the number of properties available for financing nor underwrites the loan amount based on personal income. Meanwhile, online auction marketplaces, property management software and crowdfunding may help to make more efficient decision—making and investing.
“Small investors today don’t have to rely on gut feelings about markets-they’re empowered by high-quality market intelligence and have access to a multitude of service providers,” explains Wally Charnoff, CEO of Investability Real Estate, Inc. “Small investors can now diversify their portfolio,” he says, “because they can research, acquire, finance and manage properties from afar.”
The single-family residential market can present opportunities for “mom and pop” investors, particularly those who consider five key points:
Understand the total costs: Operating expenses and fixed costs, such as taxes, can vary greatly from state to state. Property management fees are generally higher in less populated areas that have little scalability or no competition. Flood or earthquake insurance can be expensive but may not be relevant in all markets. “Investors often look for turnkey properties, which can make condos appealing, but monthly association fees can severely suppress yield and additional assessments could put the property in the red at a moment’s notice,” points out Dennis Cisterna, CRO of Investability Real Estate Inc.
Choose your tenants wisely: If you decide to invest out of your local market (and even in your own market), consider using a property manager to identify and qualify tenants and detail exactly the criteria and standards required. Common metrics are a certain credit score, no bankruptcy in the last few years and a minimum rent-to-income ratio. Landlord references are also important, as is understanding local laws about tenant selection and advertising for tenants.
Know the market as if you lived there: Talk to local brokers, read the local newspaper to understand the economy and visit the area. Identify the drivers behind the housing market and know the history. A healthy, educated workforce and population growth are generally good indicators of long-term price appreciation. Lower home ownership rates may produce strong yields as there could be a consistent demand for your investment property, but appreciation may be lacking as the market fundamentals are not dynamic enough.
Choose either appreciation or yield or a little of both: Deciding which type of market you want to invest in will help with focus. Diversifying can be a reason to look beyond local opportunities. Some markets straddle yield and appreciation, and researching the long-term trend for market dynamics is especially important as these may quickly shift to only yield or appreciation.
Know your exit strategy: The number of owner-occupied houses is important because a higher rate of home ownership may make it easier to sell the home. The overall liquidity of the market is also important. Data now exists that can help investors understand the vibrancy of a market even without much buying and selling.
NORTH AMERICAN PRECIS SYNDICATE