The Pitfalls of Single Family Rental Investments

by Dennis Spivey, VP of Originations

Owning a single-family rental (SFR) property in today’s real estate environment can prove to be an extremely profitable investment. From individuals owning a single property to larger institutional groups that own thousands, the cap rates and benefits of owning residential investment property have and continue to be rewarding. With most markets seeing commercial and large multi-family cap rates in the low single digits, single-family and small multi-family investment property offer the chance to double and even triple those rates of return. However, investors in the SFR market, as in any market, should take caution and build a clear offensive and defensive plan. Here are 5 common pitfalls investors often experience in owning single-family rentals (and their fixes).

Over-Improving a Property

It’s tempting when you buy your first investment property to let your inner Martha Stewart out in every aspect. New floors here, new cabinets there, new granite over there… Be careful not to over spend when renovating your properties. Whether it’s your first house or your 500^th, look to the market comps to see what improvements you need, and more importantly don’t need, in order to compete for tenants. Keep in mind that you are not looking to resell your property, and the things that buyers look for (new appliances, expensive flooring, nice fixtures) may not be the things that lure potential tenants. Learn to salvage what you can while still bringing in light and use inconspicuous colors that appeal to the masses. Having said that, under-improving a property can also cause big headaches down the road. Be careful not to confuse additional improvements with much needed capital expenditures – items that if not repaired now could cost significantly more in the future overall.

Insufficient Real Estate Title Searches

Most investors know and work with title companies that help them diagnose a property’s legal health. While most title companies do basic searches, not all of them go above and beyond to find ALL the issues that could arise within the ownership of the home. Ask your title company to run city and municipal lien searches IN ADDITION to their normal searches. There can often be unrecorded items outstanding that don’t show up on your initial owner’s policy. Typical title policies often exclude these from their coverage leaving the potential damages on your shoulder. Look to a national title company, such as OS National, a leading SFR rental title insurer, to provide you with deeper and more comprehensive searches.

Not Doing Your Insurance Homework

Sure, the affordable home in Tampa, Florida looks like an easy investment. It’s got solid rent potential, and a price point that seems too good to be true. But have you done your research on the property insurance that is recommended for the home? Some investors pay cash or obtain private/hard money financing to acquire homes. These scenarios often have relaxed requirements on insurance coverage, but also come with its risks. While the temptation to “self-insure” seems like a lock to generate even more yield on your investment, be careful in considering the downsides of not having proper coverage. Flood zones exist for a reason – BECAUSE YOUR HOUSE COULD SUCCUMB TO A FLOOD. Hurricanes are a real threat. The cost of proper coverage is something that needs to be factored into every purchase you make. Don’t cut corners and ignore these important safeguards for your property.

Apprehension to Invest in Markets

It’s understandable that as a real estate investor, you’d like to look for opportunities in your home town. It only makes sense, right? You know the neighborhoods, you can do your own repairs, you can meet with and filter all your tenants. While these are all positive things, don’t get trapped into thinking your local market is the only place where good investments exist. In fact, you may find out that the city just down the road generates even higher yields than your hometown. With technology and the internet, the inventory of potential investments is at your fingertips 24/7. Property management companies have also become experts at managing disparate assets spread across different neighborhoods. Don’t leave the blinders on; expand your target markets and see how owning homes in different locations than you are used to can prove to be excellent investments as well.

Not Understanding Your Real Estate Financing Options

Real estate investing is a scale game. The more properties you own, the more you mitigate potential challenges such as vacancy and bad tenants. But in order to scale properly, it’s important to consider using leverage. With the right lender and terms, financing can boost your returns and elevate your business to the next level. But don’t trust just any bank or hard-money lender. Do your homework and find an institution that excels and specializes in SFR rentals. Banks can be difficult (or impossible at times) to work with, and hard-money lenders can be very expensive. CoreVest Finance is a private lender that focuses solely on single-family and small multi-family investment loans. The suite of products offered are custom-tailored to the needs of residential investors. Because of the volume CoreVest has and continues to do (nearly $3 billion in closed loans), you get access to exceptional rates coupled with the service and industry knowledge needed to make your transaction close smoothly.

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 Dennis Spivey at 310.752.5025 or email [email protected].

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