Single-family real estate provides a valuable addition to any investor’s portfolio, but owning property comes with an array of risks that savvy investors need to avoid.
First-time SFR investors, or people who haven’t yet entered the real estate investment market, are liable to make mistakes that can sabotage their investment. Real estate investing doesn’t have to be difficult, but even experienced investors can trip themselves up. Here are some common mistakes people make:
1. Ignoring single-family rental investments
Real estate investing can be intimidating, even for people who have extensive experience with other assets. The truth is, almost any investment goal can benefit from SFR investments. Intelligent SFR purchases provide portfolios with diversity that other asset classes can’t match.
Stocks and bonds are tied directly to the stock market, and fluctuating stock prices can quickly eat into yields, and damage a person’s net worth. SFR investments provide insulation from these shifts because each property’s value and yields are related to changes in the housing and rental markets.
Luckily for real estate investors, there has never been a better time to enter these markets than now. Home sales plummeted in the wake of the financial crisis that rocked world markets in 2008, and people who might have bought homes in the past shifted toward rentals. Last year, the National Association of Realtors noted first-time homebuying hit its lowest point in almost 30 years.
That shift coincided with sizable increases in the number of people renting their homes. Between the fourth quarter of 2013 and 2014, the U.S. Census Bureau found rental vacancies sank 1.2 percent, while homeownership dipped by the same amount. This trend is likely to continue, and investors who own rental properties will benefit from the financial and societal shifts that push people away from homebuying.
2. Choosing investment properties based on proximity
While their are viable SFR investment properties located across the country, certain areas are more conducive to strong SFR performance than others. Smart investors are able to spread their investments across these desirable markets to build a balanced portfolio that provides the biggest return on investment.
Consider the difference between a home in San Francisco and a house in Cleveland. While the California home might be more “desirable,” the perceived desirability could actually make it a worse option for SFR investment.
Zillow reported the median price of a California home is about $439,000 while the average house in Ohio sells for less than $116,000. This difference alone illustrates how investors stretch their money further in certain markets than others, and there are countless factors that can make or break SFR investing in a specific region.
In the past, it may have been difficult for investors to locate the best cities for real estate investment, let alone pick a strong investment property in that region. Now, HomeUnion® makes it simple for investors to view hundreds of prevetted properties located around the country. HomeUnion®’s intense research takes the uncertainty out of long-distance real estate investing, but still provides the control that investors need to feel confident about their decisions.
3. Ignoring cash flow over appreciation
The consistent appreciation of the housing market is often cited as a prime reason to get into real estate investing, but appreciation isn’t the sole focus of SFR investments. Consistent cash flow should be a top priority for any SFR investor, but many choose properties in areas that see little to no rental appreciation.
By selecting properties that yield steady rental income, you can see returns on your investment while still reaping the eventual rewards of appreciation. Rental income also provides a buffer against rapid shifts in home value. If home prices slump, an SFR property will continue to provide rental income. That same slump could stick people who purchased a home in hopes of appreciation with an underwater mortgage.
4. Believing the hype
Some unscrupulous people and organizations portray real estate investing as a quick fix that provides immediate returns. That’s a gross exaggeration, and doesn’t accurately reflect the reality of SFR investing.
Real estate investors need to focus on the long term, with the knowledge that unforeseen interruptions in their property’s performance will happen. Vacancies, maintenance and inspections are regular parts of rental property ownership, and must be factored into cost projections before you put down money on a house.
Investing in SFR properties is relatively expensive, and minor fees such as closing costs and taxes during the initial purchase, can add up quickly. By holding on to properties for a long period of time, investors diminish the impact of unexpected events and hefty initial costs.
HomeUnion® helps new investors and experienced professionals navigate the sometimes trecherous waters of SFR investing. Register on the HomeUnion® site today to view prevetted properties or contact an expert to discuss how real estate investment can supplement your investing goals.
For more common mistakes make by real estate investors, check out The Biggest Mistakes Made by Real Estate Investors: Part 2