One of the most intriguing and readily available types of rental properties prime for investment are single-family rentals. More than 60 percent of the housing stock in the United States is single-family homes, and nearly 20 percent of these homes are occupied by renters. While the industry seems “ripe for the picking,” investing in a single-family rental property can be tricky if you don’t know exactly what you’re looking for. Here are some “do’s and don’ts” for investing in single-family rental properties.
Do: Know the “Lay of the Land”
In order to be successful, you need to perform some market research in order to find the best areas for single-family housing. A single-family rental property can have two main purposes. It can be a long-term rental or a short-term rental (think Airbnb or VRBO). The strategies for approaching these types of rentals can differ, especially when it comes to location.
If you’re looking for a short-term rental property, it’s important to keep in mind that you will likely want to look for properties that are in high-traffic areas for tourists and travelers. You will also want to focus on cities that do not over-regulate or prohibit short-term rentals. By having properties that fit these criteria, investors are more likely to have a constant stream of renters in the units.
For long-term rentals, you’re going to want to look for properties in areas that are attractive for future tenants. These properties should be in a safe location where the cost of living is affordable, the economy is on the upswing, jobs are increasing, and the population is growing. This will make your property more appealing, and you are more likely to rent it out.
Don’t: Underestimate Your Finances
When purchasing a property with the intention of renting it out, it is important that you have proper finances in order, so as not to over-extend your financial capabilities. Sure, you have enough money to purchase a rental property, but what about property taxes? What about unexpected maintenance costs that arise? Will you be able to afford the mortgage on the property if there’s not a tenant in it? What if the housing bubble bursts and property values decrease, and you have to lower your rent?
These are all things to consider when investing in rental property, and whether you have the financial means and liquidity to effectively manage a property portfolio. There will always be costs that are “hidden in plain sight,” and it is important to be prepared for them.
Do: Treat a Single-Family Rental Property Like a Business
The renters of a rental property are exactly same as customers are to a business owner. If the customer is not satisfied, the business will not thrive. It is important to understand the needs of your renters in order to keep them happy so they will continue renting your property.
Investing in single-family rental property is about building long-term wealth, rather than a get-rich-quick scheme. It is important to view these rentals in a multi-year mindset and look at everything from this long-term approach. If you buy a decent house in a decent area, the investment will eventually pay for itself with proper management and business practices.
Don’t: Overdo Your Renovations
More than likely, you will never live in your rental property, and therefore renovating your property to your exact specifications could cause unnecessary stress and expense. As long as the property is in an aforementioned “good” location, is kept up to code, and is in good condition, it should be easier to rent.
You will be able to attract and keep good renters if the property is maintained and kept up to date, but it isn’t necessary to have the “latest and greatest” to keep your rental property competitive for future tenants.
Do: Consider ‘Bundling’ Your Property Portfolio
In any portfolio, it’s good to have a little diversity. With single-family rentals, you can have large and small options in different areas, because different renters have different needs. That said, with an extremely diverse portfolio, it could be hard to keep track of different needs associated with your rental properties, especially if they are all over the map. Each state has its own laws to learn, tax returns to fill out, and vendors to work with. It can be very difficult.
By having a concentration of single-family rental properties in just a handful of markets, you will be able to manage your properties in a more efficient way. By developing a “base” in one area, you will become more knowledgeable about the area and its regulations, which is not only beneficial for you as a property owner but for your tenants as well.
Don’t: Limit Your Location Locally
It may feel very convenient for you to live, work, and own rental property in your local area. In fact, an estimated 70 percent of rental properties are owned by investors who live within an hour’s drive of the property. While the convenience of living close enough to manage your own property is great, you are placing yourself at the mercy of your local economy. If it starts to take a downturn, your risk level is higher with all of your eggs in one basket.
It is not necessary to live in the same area where you manage property. If you live in an area with a high cost of living, it would be more difficult to turn a profit on a rental property in that area and would be advisable to look elsewhere. However, keep in mind the earlier point of “bundling.” You will be more successful with strong bases in fewer locations than weaker bases in more locations.
Do: Think Beyond Managing Your Own Properties
Just like you’re learning the ropes of investing in properties, you’re also learning what it means to manage properties, including finding tenants, collecting rent, taking care of maintenance and more. That experience leads may property investors to becoming professional property managers. They manage their own properties and the properties of other investors who don’t want to be landlords.
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