The Ultimate Guide To Buying Investment Single-Family Homes

Single-family homes are an excellent investment for those looking to build wealth through real estate. They make up about half of all rental properties in the United States, and their demand has been steadily increasing, making now an ideal time to invest.

Single-family homes are a good rental investment as they offer an immediate return on investment and the potential for long-term appreciation. They are more affordable, have higher appreciation rates, and lower vacancy and monthly rental rates than multi-family homes, making it easier for landlords to find suitable tenants.

However, investing in single-family homes requires a solid understanding of the market and careful financial planning. Investors should be prepared for the time and financial commitment required to choose, acquire, and manage these properties effectively.

Research the market and neighbourhood

When it comes to investing in single-family homes, researching the market and neighbourhood is crucial. Here are some detailed tips to guide your investment strategy:

Macro Factors

Firstly, let's look at the macro factors that contribute to the concept of Highest and Best Use (HBU) in real estate. HBU states that the highest and best use of a property is that which produces the highest value, regardless of its current use. The three most important factors in real estate are location, location, and location.

Location

When researching a neighbourhood, consider the following:

• Proximity to transportation and amenities: Avoid fringe areas that may be underserved and make housing difficult to rent.
• Social value: Certain addresses or neighbourhoods may have higher social value, which can impact their desirability and rent prices.
• School districts: Being in a highly-rated school district can increase the value and rent of a property, even if tenants don't have school-age children.
• Physical barriers: Canals, railroad tracks, highways, or mountains can impact property values. For example, a house on the "wrong side of the tracks" may be worth less.
• Transit-oriented developments: Properties located near public transit in urban areas can sell and rent for a premium.

Neighbourhood Analysis

Now, let's drill down into a neighbourhood analysis to gain a better understanding of your potential return on investment. Here are some key statistics and factors to consider:

• Neighbourhood ranking: Compare the neighbourhood to others in the same city or town.
• Employment and unemployment rates: These can impact the demand for housing and the ability of tenants to pay rent.
• Median income levels: Understanding the income levels of potential tenants can help you set rental prices and assess demand.
• Owner-occupied vs. renter-occupied homes: The balance between these can impact the stability of the neighbourhood and the potential for long-term value appreciation.
• School district ratings: As mentioned earlier, school districts can significantly impact property values and desirability.
• Educational attainment: The educational level of potential tenants can be a factor in their ability to pay rent and the stability of the neighbourhood.
• Percentage of renter-occupied households: A high number of "For Rent" or "For Sale" signs may indicate a neighbourhood is not as desirable as it seems.
• Property asking price: Research recent sales, pending sales, and expired listings to understand the market value of properties.
• Historical rental income: Analyse the rental income history of similar properties in the area to set achievable rental rates.
• Appreciation potential: Consider how the neighbourhood is evolving and improving, and how this may impact property values over time.

Creative Research Strategies

In addition to crunching numbers and analysing statistics, here are some creative ways to research a neighbourhood:

• Review enrolment trends in nearby schools: This can indicate whether the neighbourhood is growing or declining.
• Research building permits: Identify new construction and significant updates to gauge future demand and price appreciation trends.
• Dig deep into MLS sales comps: Analyse statistics such as median price per square foot, percent of price change, and the difference between original and final sales prices.
• Drive through the neighbourhood: Explore the area at different times and days of the week to get a feel for the upkeep, parking situations, and overall pride of ownership.
• Look for signs of development: An increase in new businesses and development projects can indicate a neighbourhood is trending upward.

By thoroughly researching the market and neighbourhood, you can make informed and strategic investment decisions when it comes to purchasing single-family investment homes.

Find a local real estate agent

Finding a local real estate agent is crucial when investing in single-family homes. Here are some detailed tips on how to find a suitable agent to help you navigate this process:

Firstly, look for an agent with local expertise and knowledge of the rental property market. They should be well-versed in the ins and outs of the neighbourhoods you're interested in, including comparable properties, market prices, and current area trends. Their understanding of the local landscape will be invaluable in helping you make informed decisions.

Secondly, seek out agents who specialise in rental properties and have experience working with real estate investors. These agents will understand the financial metrics that are important to you, such as fair market rent, operating expenses, cash flow, return on investment (ROI), and potential tax benefits. They will also be able to guide you through the specific considerations of investing in single-family homes.

When interviewing potential agents, inquire about their experience working with investors and their own investment activities. Ask them to describe their process for finding rental investment properties and their access to off-market or pocket listings. It's also beneficial to ask about their current client base and the average length of their client relationships. Don't forget to ask for references from past clients so you can speak to them directly about their experiences.

Additionally, consider adding the agent to your local real estate team. This can be mutually beneficial, as it aligns their interests with yours, and they may be more inclined to provide you with repeat business or a small percentage of their profits.

Remember, a good investor-friendly agent should also be able to provide you with local contacts and connections, such as lenders, contractors, and property managers, which can be invaluable to your investment journey.

You can find investor-friendly agents through platforms like Roofstock's Certified Agent Network, industry associations like the National Association of REALTORS (NAR), property management companies, and real estate investing groups.

Keep in mind that investor-friendly agents are in high demand, so finding the right one may take some effort. However, their expertise and connections will be well worth it as you navigate the complex world of single-family home investing.

Leverage property technology

The property technology available today has changed the real estate industry, making it easier than ever to purchase single-family homes remotely. Investors can now search and view homes on online listing platforms such as Realtor.com and Zillow. These platforms are especially beneficial for remote investors to gauge pricing and see available inventory.

Additionally, property technology such as 3D tours and digital floor plans allows investors to conduct virtual walk-throughs of homes before making a purchasing decision. This enables investors to inspect homes at their convenience, from anywhere in the world.

When investors are ready to acquire a home, they can leverage digital transaction services to review, sign, and notarize documents online. This streamlines the process, saving time and effort.

There are also data-driven investment platforms, such as Roofstock, that focus on the single-family rental sector. These platforms allow investors of all sizes to leverage on-demand technology and services to acquire, manage, and sell rental properties with precision, speed, and efficiency.

By harnessing the power of property technology, investors can make more informed decisions and streamline the process of purchasing single-family investment homes.

Calculate the ROI

When it comes to investing in single-family homes, it's important to be able to calculate the return on investment (ROI) to determine whether a property will be a profitable investment. ROI is a metric that helps investors evaluate the potential profit margin of an investment property, either through flipping homes or renting them out.

Identify the Costs and Income

First, you need to gather all the relevant information about the property. This includes both costs and income:

• Property value
• Repair and renovation costs
• Mortgage details (down payment, loan terms, interest rate, closing costs)
• Rental income (monthly or annual)
• Monthly and annual expenses (maintenance, repairs, utilities, HOA fees, property taxes, insurance)

Calculate Net Operating Income (NOI)

To find the NOI, subtract the operating expenses from the gross income:

NOI = Gross Income – Operating Expenses

Calculate ROI for Resale or Cash Sale

If you plan to resell the property, the ROI calculation is relatively simple. Using the formula:

ROI = (Investment Gain – Investment Cost) / Investment Cost

Take the net profit (final sale price minus total investment cost) and divide it by the total investment cost.

For example, if you bought a property for $150,000, spent $50,000 on renovations, and sold it for $200,000, the ROI would be:

ROI = ($200,000 - $150,000) / $150,000 = 33.3%

Calculate ROI for Rental Property

For a rental property, the ROI calculation is a bit more involved. First, estimate your net operating income (NOI) as mentioned in step 2. Then, use the following formula:

ROI = (Annual Rental Income – Annual Operating Costs) / Mortgage Value

For example, if your annual rental income is $12,000, your annual operating costs are $2,400, and the mortgage value is $110,000, the ROI would be:

ROI = ($12,000 - $2,400) / $110,000 = 8.7%

Compare ROI to Other Investments

When evaluating the ROI of a single-family home, it's important to compare it to other potential investments, such as stocks or other real estate properties. A good ROI for a rental property is generally considered to be above 10%, but it can vary depending on the level of risk an investor is willing to take.

Hire a property management company

Hiring a property management company can be a great way to save time and effort, especially if you are new to the world of real estate investing. These companies can help you manage your investment and take care of the day-to-day tasks associated with rental properties.

Property management companies typically handle a wide range of responsibilities, including tenant acquisition and screening, lease agreement preparation and enforcement, rent collection and financial reporting, property maintenance and repairs, and legal compliance. They can also assist in preventing vacancies, which is crucial in maintaining a steady cash flow for your investment property.

When choosing a property management company, it is important to consider their reputation, experience, and track record in the industry. Look for companies with positive reviews and satisfied clients, especially those with experience in managing single-family rental properties. Additionally, understand the services offered and their pricing structure to ensure they align with your needs and budget.

Don't hesitate to interview multiple companies and ask relevant questions about their experience, services, fees, and strategies. It is also essential to carefully review the contracts and agreements before making a decision.

By hiring a reputable and experienced property management company, you can rest assured that your investment property is being well-managed, allowing you to focus on other aspects of your life or investment portfolio.

Frequently asked questions