Rental properties are an excellent investment vehicle –they offer all of the hallmarks of a great long-term investment, and have proven their worth as a stable asset class time and time again.
They can provide cash flow, long-term appreciation, and the chance for diversification, all while serving as a hedge against inflation. No wonder many investors today are flocking to SFR!
Even during times of economic uncertainty, rentals –and single-family rentals (SFR) in particular, can be a tremendous way to grow wealth and gain financial freedom –especially when investing in multiple properties.
However, the majority of investors only invest in one property –with 50% of investors owning just one rental. The reasons for this vary considerably, but at the end of the day, it usually comes down to the fact that one property is all that they’re able to manage on their own.
But while multiple properties do mean additional work, owning multiple rentals can be an excellent investment, one that offers tremendous long-term rewards. One property can produce returns that’ll help supplement your income, but five properties –or ten, could mean complete financial freedom.
Whether you’re looking to get started with your first property or considering expanding your portfolio, the great thing about SFR investing is that you can take action to directly impact your return on investment –especially if you start ahead of time. And there’s no need to go it alone when it comes to SFR management –by working to assemble your team, you’ll have the resources that you need to outsource the work while growing your portfolio.
If this sounds good to you, here’s a look at a few things that’ll help you to get the most out of your investments.
Establish Long-Term Goals
First up, make sure you take the time to establish long-term goals from the start. Everyone’s investment goals look different, with some people looking to invest in enough properties to obtain financial freedom, while others are just hoping for an additional revenue stream to supplement their income. No matter what your goals look like, make sure you take the time to clarify them –so you can develop an investment strategy that’ll help you reach them.
Set Your Investment Criteria
Next, you’ll want to establish your investment criteria. This means determining how many properties you’ll want to invest in, along with your criteria for each of those properties. Start by outlining whether you’re looking for cash flow, or appreciation, or both. If cash flow’s important to you, there are plenty of locations –especially in the Midwest, or secondary markets where properties tend to perform well from a cash flow perspective. For long-term appreciation, you’ll want to consider areas that are expected to experience demand over the next few years. You’ll also want to determine what type of returns you’d like to generate for each property. Setting clear criteria will give you a benchmark that you can use to assess each property, allowing you to only invest in rentals that meet your criteria.
Understand Leverage
The concept of leverage allows you to grow your money faster, accelerating your returns –when used responsibly. Here’s an example of how leverage can help increase your returns:
- Paying All-Cash
Let’s say that a rental costs 200k total, and rents at $1,500 a month, and appreciates at 4% per year. Your net income per month is $1,000, after expenses, but since you paid in cash, you won’t have a mortgage to pay back.
In one year you’ll have:
Net income of 12 x $1,000 = $12,000
Appreciation of $200,000 at 4% = $8,000
Total: $20,000
- Using Leverage (30-year mortgage)
Now let’s say you are buying five 200k SFR properties, with 20% down on each, so the amount you’ve spent is $200,000. They rent for $1,500 per month and appreciate at 4% a year. Your net income each month is $200 per property, as you’ll need to pay the mortgage. Here’s what you’ll have in one year:
Net income of (12 x $200) x 5 properties = $12,000
Appreciation of ($200,000 x 4%) x 5 properties = $40,000
Total: $52,000.
As you can see, in this fictional example, the cash flow is the same in both scenarios, but appreciation is where you’ll really stand to benefit when you use leverage. The downside of mortgaging the properties is that you don’t own any of the properties outright until you’ve paid off the mortgage, but it shows how your total returns can skyrocket when you’re able to use other people’s money to finance your investments.
Have a Funding Strategy
You’ll also want to have a plan for funding your investments early on. Many investors find it helpful to get preapproved for a loan, as this allows them to more quickly when a deal arises. However, the bank has a limit on the number of mortgages that you can have at any one time (usually four). So when it comes to investing in subsequent investment properties, it’s a good idea to explore alternative funding options.
See: 30 Tips for Financing Your First Investment Property
Look to Diversify
The best investment strategies always include a level of diversification, and this is true when it comes to SFR. Even if you enjoy having all of your investments in one location, keeping all your eggs in one basket could be risky. Spreading out your investments geographically means that you’ll be more protected from any dips in the local housing markets.
Find a Growth Strategy
If you are looking to grow your SFR portfolio, then you’ll want to find a growth strategy to implement. Once you have your first investment in the bag, it is easier to get the ball rolling on the next.
Here are a few common strategies that you can use to expand your portfolio.
- The BRRRR Method
BRRRR stands for Buy, Rehab, Rent, Refinance, Repeat. This strategy can be a great way to grow your portfolio. To start, you’ll want to purchase one property –ideally, a value-add property; one that’s below market value or at a discount due to the fact that it needs repairs. You’ll then renovate the property, fixing it up to rent it out. Once the property’s rented, and the value’s increased, you’ll be able to refinance it, and use the money to invest in another one. Then repeat as often as necessary!
When it comes to BRRRR strategy, there are some important things to keep in mind if you’re just getting started. For one thing, you’ll want to consider financing your properties with a mortgage, or hard money loan –rather than buying them outright. This will make it much easier if you’re looking to refinance. Additionally, if you’re going to be going the BRRRR method, make sure you don’t mess up your debt-to-income ratio. Taking on more debt (like a new vehicle) could mean that you’ll have trouble qualifying for a good interest rate when it comes time to refinance.
See also: Rent Estate™ Podcast Episode 10: Hard Money Loans – What You Should Know
- The Snowball Effect
The snowball method is similar, except it involves saving the cash from your current investments and using that to secure additional properties rather than refinancing. Over time, as you acquire additional properties, your cash flow will increase, and you will be able to grow your investment properties more quickly if you snowball the proceeds into additional properties.
- Fix and Flip
While a majority of SFR investors prefer to keep their investments and rent them out, fixing and flipping, if done right, can be a way to grow your portfolio even more quickly, allowing you to pour the proceeds from the sale into additional properties. Just take care; making a profit with this investment strategy is highly contingent on timing the market carefully. As long as the market’s continuing to grow, and housing prices climb, there’s money to be made. But if there’s a dip or temporary cooling, a house flip could suddenly become risky, and you could stand to lose money.
Always Conduct Research Ahead of Time
Next up, the most crucial rule in real estate: always conduct careful research before investing in a property. You’ll want to ensure that you find a good market –one that’s up-and-coming or expected to experience growth –especially if appreciation is part of your strategy.
Tip: Head over to the Renters Warehouse Research Center to see how well your market checks out. Enter the county and see current data on housing price performance, population changes, unemployment, and more. Find an area that’s worth investing in!
Run the Numbers
Once you have a property in your sights, you’ll want to run the numbers to see what type of returns you can expect with the property. Take the time to look at what other, similar properties are renting for on Zillow and Trulia. Using these figures, you’ll then be able to estimate the type of returns that you’ll be able to generate. What will your cash flow look like? What about your cap rate –and cash-on-cash returns? Make sure you input data that’s as accurate as possible for a clear picture of the type of revenue that you can expect.
See: Numbers You Should Be Running on Every Property
Accurately Estimate Costs and Repairs
One area where many landlords often get into trouble is underestimating the cost of repairs and maintenance. The 1% rule, though, is a good place to start. With this rule, you estimate that the cost of maintenance and repairs will cost roughly 1% of the property’s value each year –however, this number will be higher, depending on how old the property is and what condition it’s in.
Regularly Assess Your Property’s Performance
It’s not enough to assess a property before you buy it. You’ll also want to assess the performance of the individual properties in your portfolio at the end of each tax year, to see how well they’re performing. If you end up with a property that’s not performing as expected, it may be best to consider selling that property, and putting the proceeds into something that’ll generate returns that are more in line with what you’re looking for.
Get Organized
Next up, being organized can help tremendously when it comes to your everyday tasks, as well as if you end up selling any of your properties at some point.
When it comes to everyday organization, make sure you keep good records of income and expenses, and make sure you use separate folders for each property. Being organized and keeping good records will help to make investing easier and less stressful, saving you hassle at tax time too.
Here’s a look at some information you’ll need if you go to sell an investment property:
- Property valuation
- Market and neighborhood data
- Interior and exterior inspections
- Tenant payment history
- Projections for appreciation, income, and gross returns
- Any repairs estimates, if relevant
- Preliminary title report
Build a Reliable Team
Finally, if you’re planning to grow your portfolio, then it’s crucial that you surround yourself with the right people. Assemble a team of professionals who are experts in their fields; and who are willing and able to provide sound advice, and assist you as situations arise.
People you’ll want to have on your team include:
- Service Professionals – A plumber, electrician, HV/AC repairperson, maintenance team –and more. With rentals, things will need to be maintained and require repairs, and having a team of professionals that you can rely on will make life much easier –saving you from having to rush to find an electrician last minute when the power goes out.
- A Property Manager – A good property manager is tremendously valuable, especially if you’re planning on growing your portfolio. A property manager can handle all of the day-to-day tasks and help to reduce the number of vacancies and tenant turnovers you experience.
- Real Estate Agent – An investor-friendly real estate agent can prove to be a great asset. While most agents sell properties to homeowners, there are some who specialize in selling to investors. Looking for an agent who’s experienced with investment properties is your best option. If you’re purchasing properties in multiple markets, you’ll want to find a good agent in each of those areas.
- An Attorney – Finally, a good attorney can be invaluable, helping you to ensure that you maintain compliance with the law. A good legal advisor is important, especially if you’re planning to invest in different states, and you’re unfamiliar with the laws in that state.
While growing your SFR portfolio isn’t something that will happen overnight, it’s a long-term strategy that can offer tremendous rewards –and it’s worth starting early –even if you have to start small. The sooner you begin, the longer you’ll have to benefit from the all-important benefits of SFR: long-term cash flow and appreciation. It’s time to put your money to work for you!
Ready to take that first step toward investing? Be sure to claim your FREE Guidebook: So, You Think You Want to Buy an Investment Property? Or maybe you’re looking to buy your second property? Check out: Investing in Your Second Property: What You Need to Know.
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