The Internet offers unprecedented freedom and allows investors to purchase single-family rental properties located anywhere from the comfort of their homes. That simplicity doesn’t eliminate some of the risks associated with SFR investing, and there are certain details every investor should keep in mind.
If you’re just getting started in the rental investment market, it’s crucial that you keep the following elements in mind. These details can save you money throughout the process and ensure you maximize the return on your investment.
Don’t do too much
Many first-time investors spend too much effort and money renovating their rental property in ways that don’t offer a significant return. When people purchase a home, their natural instinct is to make it a place they would like to live for a long time. That instinct is great when you buy a home for yourself, but it can lead to serious headaches if you spend a bundle updating unnecessary parts of a rental home.
Ideally, investors should complete the minimum number of renovations and fixes needed to make a home safe and appealing to renters. Doing extra work not only increases the amount of money an investor needs to recoup, but could make it more difficult to find renters. If a home features too many improvements, an appropriate rental cost might be too expensive for the local market. That could force the investor to charge less for rents than is economically viable.
The mix between a home’s total cost to an investor and the amount they charge in rent requires careful calculation. Otherwise, the rental income from a property might not be adequate to cover the mortgage and other expenses.
Investors who want to come out ahead should rely on the 1 percent rule, according to money management site Dough Roller. This belief holds that rental income from a property should always equal at least 1 percent of the home’s total cost to the investor. While this rule doesn’t guarantee profitability in every situation, it is a helpful way to quickly assess a home’s potential yield. By carefully budgeting home improvements and other costs, an investor is able to ensure he or she adheres to the 1 percent mantra.
Keep appreciation in mind
When you calculate the cost of a building and the appropriate rental rates for a space, remember the structure will probably appreciate over time. This is one of the key benefits of investing in real estate compared to other assets, though appreciation is reliant on you selecting a property in an area that features a strong housing market.
Your rental property will yield consistent cash flow in the form of rental income, but this is just one small part of its potential value. If an investor holds a home for several years, the value of that property will likely increase. This means the investor has built equity in an asset that he or she can eventually sell for far more than his or her initial investment.
Homes tend to appreciate consistently in most market conditions. RealtyTrac recently reported house prices grew faster than wage growth in 76 percent of U.S. markets for the early parts of the year.
Property management matters
It’s too easy for novice investors to enter the SFR investing market without a firm grasp on the importance of property management. A property manager handles the details that can make or break a real estate investment’s profitability, but many investors treat management as an afterthought in their investing strategy.
Property management advertises a home to find tenants, carefully manages those tenants when they rent the house, ensures any maintenance issues are fixed promptly and keeps abreast of the local real estate market to provide insight into trends. It also handles seemingly simple jobs that can quickly get out of hand, including evictions when a tenant-landlord relationship sours. Effective property managers have a deep understanding of an area’s tenant rights regulations and make sure an investor doesn’t get embroiled in costly legal issues.
All of these elements are difficult for an inexperienced investor to handle on his or her own, and the task can be nearly impossible if the investment property is several hundred miles away from the investor.
Emotion on the back burner
If there’s one thing that these tips make clear, it’s that emotion can get in the way of effective real estate investing. Too much emotional investment makes it difficult to limit the upgrades made to a house, and can lead to disputes with property management over the best course of action. HomeUnion® eliminates this emotional issue and provides a hands-off approach for investors who want the benefits of SFR investing without the hassles.
Registration on HomeUnion®’s site provides investors with access to hundreds of prevetted properties in the best rental markets across the country. With in-house financing and property management, investors can take an easier route to SFR investing success.