5 things to know about investing in single-family rental homes

  • Written by MarketWatch
  • Published in Economics

Single-family rental homes comprise more than one-third of all U.S. rental properties — about 16 million currently, with another 13 million new rental households expected to be formed by 2030. Since U.S. housing stock is not keeping up with this future demand, the sector should enjoy a significant tailwind given these favorable supply/demand trends..

Not surprisingly, demand for single-family rentals is at an all-time high [1]and showing no signs of slowing.

There are many attractive characteristics to the single-family rental asset class. For starters, returns have historically moved independently from the stock market, meaning they lack correlation. In fact, data[2] compiled by my company Roofstock[3] show that single-family home prices and stock prices are almost perfectly uncorrelated. This means the ups and downs of the stock market have almost no direct impact on home prices, which tend to change in value more slowly and be influenced by numerous factors such as the strength of the local economy and amount of supply added.

If you’re a newcomer to single-family rental investing[4], one way to think about it is like an inflation-adjusting bond with an equity kicker. The rental income less operating expenses generates current distributions — like the coupon on a bond — and rents can be adjusted annually, providing inflation protection. Finally, the equity “kicker” comes in the form of building wealth as your tenant pays down your mortgage for you while the property can grow in value over time. It’s entirely possible you can get a nice double-digit overall return on your equity over an extended holding period.

Purchasing and owning a single-family rental home is simpler than you might imagine. Here are five tips to get you started:

1. Know your investing criteria first

With any investment, be it stocks, bonds or real estate, you need to know what your objectives are. If you’re focused on safety and security, consider exploring low-risk investment homes that generate steady, reliable yield. An example of this may be a more expensive investment property in a good school district. You’re going to get a lower yield, but you may see better downside protection and less volatility. If you have a longer-term horizon or you’re seeking higher returns, you may want to take on a little more risk. Often, lower-priced homes will be more risky, but you may get higher yields and potentially higher long-term returns.

Read: Home listing prices are flat or falling in these 10 cities — has the market reached its peak?[5]

2. Don’t limit your investment property search to where you live

Consider this: If you lived in Atlanta, you wouldn’t buy Coca-Cola stock simply because its headquarters are local. The same principle applies to real estate investing. If your primary residence, income property, and job are all located...

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