Investing in instruments like stocks and commodities is very different from investing in single-family rental real estate. The latter is a much more hands-on venture where you have more control but also more responsibility for the performance of the asset. As a result, real estate investing requires that you develop a more in-depth understanding of the process.
Previously, we discussed seven secrets for success in single-family rental real estate investing. Below are five more tips that can give you a competitive advantage and also help protect you from some common pitfalls.
What To Keep In Mind As You Enter The SFR Market
Before you make a single family rental purchase, be sure you have a solid plan in place that incorporates proven best practices.
1. Be thorough in your due diligence.
This applies to the economic and physical condition of the property. You want to be sure that you, your real estate broker and your inspector are through in your assessment so you truly understand what will be involved in making the property a successful rental. This is especially true of the older homes that investors often buy. Are there any hidden issues that you will need to address in order to bring the home up to code? Mold behind the walls? Failing foundation? Faulty wiring? When buying a home for your personal use, you have the luxury of dealing with problems as time permits and fixing many things yourself. With a rental investment, you will have regulatory agencies looking over your shoulder to ensure repairs or renovations are done right, and you might need more permits and licensed contractors.
2. Investigate the local rental market specifically.
When buying a home for yourself, you and your real estate agent look at the “comps” to determine a fair price for the property based on the sales of comparable houses nearby. However, that does not mean the property makes good investment sense based upon prevailing rental rates in the area. There are many factors that affect rents, and you must be sure to investigate and understand them as you research your purchase and prepare your pro forma.
3. Understand the impact on your tax situation.
Finding, evaluating and purchasing a single-family investment property takes a significant amount of time and effort. The last thing you want to do is complete the transaction only to find out that it will have a negative impact on your tax situation or not be as positive as you thought. For example, as a passive investment, the IRS only allows you to claim expenses equal to or less than your income in a given year. You can carry forward any losses, but if you were anticipating excess losses to offset income from other areas in the current year, you could be sorely disappointed. Before making a real estate investment, talk with your tax advisor to ensure you understand the implications and impact on your specific position. This is especially important if this will be your first purchase.
4. Decide how you're going to manage the property.
Do you have the time, interest and expertise to manage the property yourself? Are you planning to hire a property management company to take on the operational details? These are decisions you should make before you complete the financial analysis and move forward with a purchase transaction. You may even decide to streamline things further by buying a turnkey investment that has renovations complete, a tenant in place and a property manager on-board to handle the entire process.
5. Be prepared to act quickly.
In all cases, and certainly, if you are looking to make an investment in a hot real estate market, you must be prepared to act quickly. It is likely that there are others looking to snatch up good deals, and the difference between acquiring a property and missing out can be how ready you are to make an offer and close on the transaction.
Knowledge Is Power In SFR Investing
There is nothing passive about real estate investing, except the tax status. In single-family rental real estate investing, the most knowledgeable and well-prepared investors are the most successful investors. Although there are real estate agents and investing consultants who can present you with a list of viable properties and their pros and cons, ultimately you must assess your options and purchase the asset that gives you the best chance for a good return. But if you keep these crucial considerations in mind, you’ll be well on your way to a positive cash flow even before you sign on the dotted line.
