If you are a landlord or aspired investor, you know the market is strong. According to U.S. Census data, the rental market has increased by 37 percent since 2006 and continues to grow. Renting is steadily outpacing ownership; more than 30 percent of Americans rent and the market shows no signs of slowing down as millennials become the highest drivers of demand for single-family rental homes (SFRs).
With increasing demand, investors have also given the SFR market more attention. Competition is intense, especially as Wall Street’s presence becomes more pronounced. The independent investor must create efficiencies and drive steady earnings to keep an edge. With a focus on strategy, diligence and standardization, local independent investors can compete. Here are three tips on how.
- Understand your strategy and stick to it. Determine your objective, what fits your criteria, and what doesn’t. Why do you want to rent properties? To make monthly cash flow, to build equity, or because you like renovating? If you want monthly cash flow, you’ll need to consider the rent value less expenses—mortgage, tax, insurance, maintenance and Home Owners Association (HOA) fees. Maximum cash flow results from homes that have low or no HOA cost, low tax rates and lack insurance risks such as being in a floodplain; but these properties likely won’t appreciate in value as much over time. Conversely, higher taxed and newer homes won’t have the same level of monthly cash flow, but will appreciate in value over 20 years and are a better fit for a long-term equity-building strategy. Once you’ve defined your goal, you’ll also need to determine your risk threshold, repair tolerance and tenancy type (example: Section 8 housing). If it’s not in the right area, the right price or needs repair beyond your tolerance, don’t invest simply because it’s a tempting deal. Pick opportunities that you’re comfortable with and be patient in finding them. Filter your choices so you can focus on the opportunities that best serve your goals.
- Have the right people and processes in place. Identify who is involved in the start-to-finish process and build relationships throughout acquiring, renovating and marketing the property. When opportunities arise, your team and resources will be readily available. Having pre-established contacts who understand your needs and strategy in advance helps avoid miscommunication and wasted time. The right people can also advise on potential setbacks or missteps before they arise or intensify. For example, many investors choose to skip inspection before renovations begin. This is a costly mistake. Anything that is wrong with the property will be known eventually, so spending the money upfront on inspection creates a valuable efficiency. Inspectors advise on all needed repairs and in the correct order—structural repairs first, such as foundation, plumbing, electrical and roofing, and cosmetic repairs last. This ensures that any work is done right the first time.
- Templatize cosmetics and automate operations where possible. It doesn’t make sense to customize every property. If your strategy dictates a specific price point, use the exact same materials; if not, segment the properties into tiers and scale materials to fit those demands. The idea is to please 70 percent of the population, so the same beige paint, oak flooring, Uba Tuba granite and stainless steel appliances will typically work for every house (and, of course, know your measurements). Templatizing cosmetics also promotes investment in high quality materials that will last through several tenants. When handling transactions with tenants, use automated electronic tools, such as DocuSign for official documents or Buildium for rental management. As a landlord, you can get creative in other administrative efficiencies, such as automatic bank drafts, offering two-year leases to credible tenants, or hiring a maintenance crew to perform routine services and checkups. As previously mentioned, fostering relationships with a realtor who can set credit and income criteria and administer the lease helps tremendously.
Remember that despite the thriving market, flexible investor strategies and emerging technological efficiencies, renting out properties is a long-term commitment to get the best return. Planning upfront, building relationships and efficiently sourcing tools and materials prevents wasted time and money, enhancing your competitive advantage. Protect your investments across your portfolio by working with long-term goals in mind, and the market will reward you.
Brian Spitz is founder of Big State Home Buyers, a Houston-based real estate investment advisor.