Mythbusters: Taking on Residential Real Estate Investing Misconceptions

By: Tim Leber, Relationship Manager

What does residential real estate investing bring to mind for most investors? Perhaps you might think of the pains of rehabbing properties on the fix and flip side; or perhaps it brings to mind a potential management nightmare with tedious tenant management and maintenance expenditures.

Coming from the commercial side of the business, I have always been intrigued by working on large balance financing opportunities, but for the everyday private investor, it is difficult to build up enough capital to begin investing in a single large project. Even for high net worth individuals, starting small and building your portfolio one small property at a time becomes the most effective way to mitigate risk exposure in a volatile market.

Myth #1: Only Invest in Your Local Market

Several things can be challenging when starting the purchase of investment properties, and sometimes getting out of your comfort zone can end up bringing the highest yields on your investment properties. Many investors look only within a 45-minute to an hour drive radius of where they live and work. This is a good strategy if you happen to live in a market with high rents, low property values, and strong rental demographics, but how many of you reading this article happen to live in a top 10 rental market? It might be time to branch out to locations where property values are low, but rents are high with demand increasing for rental units.

Myth #2: Tenants Won’t Pay High Rents

There are several things the last financial downturn taught us about consumer habits and purchasing power. First of all, several families hit by the latest recession got hurt on income and typically had their homes foreclosed on or were forced to find cheaper alternative places to live such as apartments or rentals. Even though credit scores have had a chance to recover, there is still a hesitance for families with high debt obligations to stretch and try to take on a mortgage, even if rates are in line with what they can afford. The shift in mindset, as millennials enter the home buying age and older workers have less job stability, is that people want to have all the pride in home ownership without the anchor that comes with a mortgage and property maintenance costs. The growing mindset comes from people needing to be more mobile with their jobs and changing housing needs geographically and size-wise.

Myth #3: There’s Too Much Maintenance

Are you trying to buy value-add properties? This isn’t an HGTV show, where everyone is looking to buy homes, put in $50k in rehab, and flip their homes. While following the fix-and-flip model is a great tool for providing an enviable return on equity if you leverage right, it requires a little more of a hands-on approach than your everyday passive investing. Rental investors are still finding great opportunity in buying undervalued homes at auction or REO sales, and aggregating large pools of lease-ready properties. As long as you are reserving and accounting for steady annual maintenance and capex costs (such as lease-up/marketing and turnover between tenancy), you can find steady cash flow as your property value and rental income grows. The single family rental market has become streamlined enough in today’s investing space that there are property management firms, such as Renters Warehouse, that cater exclusively towards operating these portfolios similar to a multifamily project. But, instead of managing multiple units in a single location, they manage single units in multiple locations.

Myth #4: It’s All About High Leverage

Some investors come to the table looking for 90% financing with the potential to have a lender fund 100% of the rehab throughout the process. They often forget to look at the details of obtaining such leverage. Better understanding leverage and the cost of capital is critical to growing your rental portfolio. It’s more about finding the RIGHT leverage for your budget and strategy, rather than the highest possible leverage. For example, there is a misconception that the rehab portion of the stabilization process needs to be 100% financeable. But when you start incorporating the multiple points and interests added to each construction draw, as well as the repeated site visits and inspection costs from a lender, your cost of capital can significantly exceed your expectations.

Borrowing in the residential income space can be a new experience for many investors, whether you are just starting in the space, or moving into the space chasing higher yields from the commercial or multifamily side. There are several questions that will arise in the process that are often misunderstood. Finding the right advisor who will guide you into the space will end up being the most important element.

Find out more about how to debunk some of your negative perceptions about the residential income space by reaching out to us at CoreVest.

CoreVest is a leading provider of financing solutions to residential real estate investors. We provide attractive long-term debt products for stabilized rental portfolios as well as credit lines for new acquisitions. For more information about how CoreVest can help grow your rental and rehab business, please call 844.223.2231 or email [email protected].