Single-Family Rentals: A Good Deal for Investors
Thanks to TV, investors often think home flips are the main way to make money off of single-family homes, but a hold-and-rent-out purchase could be the better option.
WASHINGTON – When real estate professionals think about a rental property, they often picture large or maybe 10-unit apartment buildings – but they should envision single-family homes, said Bill Lublin, CEO of Century 21 Advantage Gold and president of Lublin Corp Property Management in Southampton, Pa.
Single-family rentals have increased by 31% in the past 10 years and make up 42% of the housing stock, Lublin noted during his session about buying, selling, and managing single-family rentals at the National Association of Realtors®’ (NAR) convention last year.
“We’ve been in an HGTV world, where people buy, fix and flip properties in an hour – without any real surprises – and making a bunch of money,” Lublin said. “When investors buy a home to flip, they have the cost of buying, repairing and selling it. When they buy a single-family rental, they only have to worry about acquisition costs. They’ll amortize those over time and get some deductions. They don’t have to worry about selling costs right away or short-term capital gains.”
Single-family rentals are a good way for entry-level investors to begin, Lublin added. They’re generally less expensive than duplexes, and families that rent them typically stay longer, reducing turnover costs – and investors usually don’t have to do as much renovation to make a rental attractive as they would for a “fix-and-flip.”
In addition, rentals offer four financial benefits: income, depreciation, equity and appreciation. Income wins over profits, Lublin said. “With profit, you get it, spend it and move on. Profit is fleeting, but income is forever.”
Lublin cited a case in Philadelphia: a rowhouse he sold to an investor for $85,000 about four years ago. While the house was dated, it was in decent shape.
“The new investor did minimal renovation and rented the property immediately,” he said. “Now, because we’ve seen some significant appreciation recently, that home is worth probably $150,000 – an increase that isn’t taxable because they’ve not sold it and realized the gain. And they’ve received income during that time.”
Despite the benefits of investing in single-family rentals, selling to investors is a skill, according to Lublin. Initially, “you need to figure out what investors’ goals are. Later, you have to review with them whether they’re meeting goals. And in doing that, you’re looking at the ROI (return on investment).
“A really simple rule – whether you’re selling or buying – is the 1% rule,” Lublin said. “If the rent is 1% of the sale price, it’s a good return.” Lublin said this method doesn’t account for taxes but is a “quick and dirty way to determine whether a property is a good investment for your client or yourself.”
The property management move
In the 2008 downturn, some real estate professionals extended their businesses into managing rental properties.
“Management fees aren’t a lot of money,” Lublin said. “But they are a steady flow of income, which is really useful in a slower market if you have a large enough portfolio.”
Before making such a move, Lublin advised asking some tough questions to determine “whether the juice is worth the squeeze:”
- Are you willing to do what’s necessary to make sure rents are collected?
- Will you be able to manage the expenses, which means making sure repair costs are as low as possible, income is collected, taxes paid and licenses maintained?
- Can you obtain and retain tenants?
- Do you know what your municipality requires to keep the property in compliance with taxes, licenses and inspections?
Then there’s the technology. Some real estate companies say the only software an agent uses every day is the MLS, Lublin said, but “You’ll need to be in property management programs every day to keep track of income and expenses, report to your clients, and make sure you’re making enough money to keep the doors open.”
You don’t have to swing for the fence every time you make an investment, Lublin said. If you try to get a base hit – something that’s a good deal – you can generate income over the long haul.
Source: National Association of Realtors® (NAR)
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