Investors looking to expand their portfolio have a number of options in today’s real estate market. While many investors are finding success with commercial real estate properties, such as retail strip centers and office buildings, the less-experienced investor may want to focus on an investment vehicle with fewer moving parts.
That is one reason why single family rental properties are popular with real estate investors today. Unlike large commercial buildings, these properties contain just one tenant and typically require less maintenance. Obtaining mortgage financing can be easier as well, since the underwriting process for a residential home is less complicated than that of an automotive or light industrial property.
If you’re looking into single family rental properties as you plan your next investment, be sure to read these key points to bolster your knowledge and position yourself for success.
Single Family Rentals and Commercial Lenders
Even though a single family rental (or SFR) property is not classified as commercial, borrowers can obtain loans for these properties from some commercial lenders. The key in most instances is that the property is purely a rental and that the owner is at no point an occupant. This means that you would have difficulty working with a commercial lender if you plan on using the rental property for a month out of the year.
But if you plan on renting the property out full-time, you could secure an attractive loan through a commercial lender. As always, the best fit for you will depend on your specific needs, your financial history, and the property in question.
Identifying a long-term strategy
The first step for investors should be to establish a clear strategy for their investment property. In particular, they should know how long they want to hold on to the property after making their purchase.
For instance, if you want to purchase a property, quickly make repairs, and then re-sell for a profit, then you will want to work with a lender that specializes in fix-and-flips. However, many investors in today’s market are executing fix-and-hold strategies that require a longer-term loan.
Your long-term strategy will dictate the type of loan you secure so take some time to determine how you wish to move forward. Otherwise, you could be paying more than necessary each month.
Research possible locations
It sounds obvious, but you will want to purchase an investment property in an area where prospective tenants actually want to live. Instead of just making assumptions based on your knowledge of a particular town or district, try checking for these distinct characteristics:
Check employment records. You can assume that the more economically prosperous areas will have a greater rental demand
Look for nearby amenities that would add value in the eyes of a renter, such as grocery stores, schools, and healthcare facilities
Check local crime rates to ensure the area is in a safe neighborhood
Conduct some research to learn whether the area in question is targeted for future developments that could affect the value of your property
Determine how involved you want to be
Do you want to purchase a property that requires significant repairs or do you want to purchase a property that could house a renter tomorrow? You could ultimately turn a greater profit by flipping a property that needs a significant amount of repairs, but the amount of work needed to complete the necessary improvements could be more than you can handle.
Before purchasing an investment property, you should also consider the amount of work you may have to do as a landlord. While a larger multifamily property with multiple tenants would certainly require a greater effort, there are still a number of tasks related to maintenance and rent collection to consider.
If you do not have the time or are simply unwilling perform these duties, it could make sense to hire a property manager. But again, the fact that single family rentals are relatively smaller properties with just one tenant can make the whole process easier – even for first-time investors.