The clear benefits of single-family rental real estate investing can cause many people to rush into the market without fully understanding some of the pitfalls that could sabotage their efforts. By looking at the common mistakes that impact real estate investors, you can maximize your personal yields and make SFR investments a crucial part of your portfolio. Here are some more mistakes to watch out for:
5. Buying in poor cash flow zone
Consistent cash flow from tenant-occupied properties is one of the key benefits provided by SFR investing, but many investors choose properties that don’t deliver adequate returns. Some markets lend themselves more to sustainable cash flow than others, and picking the proper areas to invest can be difficult for the inexperience real estate investor.
The magic number for sustainable rental cash flow is 1 percent. If you can charge a rent that is at least 1 percent of the home’s purchase price, you’ll be able to reap consistent cash flow from a property, according to Doughroller.net. This is true in areas where the increase in rental rates and home prices have kept pace with one another, like San Antonio.
While San Antonio has strong demand for rental properties, it also maintains a relatively large 3.6 month inventory of single-family homes, according to the San Antonio Board of Realtors. This is critical for the investor who wants to maximize cash flow, as it keeps the prices for single-family homes reasonable in an area that maintains above average interest in rental properties.
As a result, investors in San Antonio and similar areas can charge tenants rents that deliver solid cash flow against the relatively modest initial purchase price of their rental property.
This doesn’t mean investors should simply target inexpensive homes as SFR investing opportunities, however. Buying cheap homes in hopes of a greater return on investment can actually have the opposite effect.
Oftentimes, inexpensive homes will be in a neighborhood that’s not conducive to rent appreciation or strong property management. These properties may suffer from a greater incidence of vandalism and other crimes that could drive up maintenance costs and eat into the property’s worth.
6. Picking a bad property manager
Property management is rarely talked about in SFR investment discussions, but it’s a crucial element that separates the successful investors from those who struggle to see returns on their properties.
Strong property managers are intimately familiar with the conditions in the property’s local rental market and have an understanding of the larger real estate market in the area they work. This helps them identify potential tenants and keep rental properties consistently occupied.
Good property managers are better at keeping existing tenants happy with prompt maintenance and regular checks on the property’s condition. This ensures lower costs when the current tenants decide to move on. The best property managers generally maintain a suite of properties, which means they have an understanding of the marketing needed to get the word out about rental opportunities.
Bad tenants can be a huge problem for SFR investors, and an inexperienced property manager will only exacerbate the problem. When tenants are creating issues, it’s critical investors have a property manager with an intimate understanding of tenants’ and landlords’ rights. Good property management can quickly evict problem tenants and locate replacement tenants fast.
7. Failing to account for all the necessary parties
As the issues introduced by poor property management make clear, SFR investing can be something of a team effort. While the investor puts up the initial funding, the success of the entire venture can hinge on a variety of third parties that help keep the property running smoothly. Coordination between all these people is critical to make things function correctly.
If you enter into SFR investing on your own, you are taking on responsibility for a series of interactions between the seller, property manager, tenants and more. This can be an exhausting process, and it may lead to disputes and confusion that impact a property’s value to the investor. Additionally, this increases the overhead an investor needs to take on as he or she prepares a property for rent.
Unless it is tightly managed, these relationships can create costly delays and bickering that limits a property’s worth.
Instead of trying to manage all these elements, investors can turn to HomeUnion® for a simplified approach to real estate investing. With HomeUnion®, investors can select from prevetted properties in the best locations for SFR investment around the country. This eliminates a lot of the confusion that can lead to investment mistakes, and HomeUnion®’s benefits don’t end with helping investors find properties. HomeUnion®’s in-house lender can provide financing for investors, and HomeUnion® locates the best property managers in any location to manage investors’ new properties. Investors who want to avoid potential pitfalls as they enter the world of real estate investing should register on HomeUnion®’s site to see hundreds of prevetted properties.
For more common mistakes make by real estate investors, check out The Biggest Mistakes Made By Real Estate Investors, Part 1.