Purchasing a single-family home as a rental investment property differs from buying a home to reside in personally. When evaluating a single-family rental (SFR) as a potential investment, there are several key factors to consider that may not come to mind if the home is meant to be your personal dwelling.
The same applies if you are considering a build-to-rent (BTR) property. If you are unable to find an existing single-family home to buy and rent out, you may be missing out on the chance to increase your passive income. The alternative is to construct a property yourself.
Regardless of the approach, there are essentially six key areas to evaluate when considering a single-family rental property as an investment.
1. Determining the Appropriate Budget for a Single-Family Rental Property
When searching for a single-family rental (SFR) property, look for one that has strong potential for appreciation and positive projected cash flow. Examine both properties that are more expensive than you can afford and those within your budget, as real estate often sells for less than the listed price.
For appreciation potential, consider a property that could attract high-paying tenants with a few cosmetic changes and minor renovations. This will also increase the value of the property if you decide to sell it after a few years.
To ensure a profitable investment, it is crucial to purchase a property at a reasonable price. A common recommendation for rental properties is to pay no more than 12 times the expected annual rent.
2. Choosing the Right Neighborhood for a Single-Family Rental Property
When searching for a family home to occupy, you might look for one located in a neighborhood with a low number of renters. However, as a landlord, you should look for a property in a neighborhood with a high percentage of renter-occupied homes, indicating strong demand for rental properties.
Another sign of a strong rental market is a steady increase in rental prices and high home sale prices. Investing in a market with strong growth in home prices can provide an advantage, as you can tap into the owner’s equity to fund the down payment on a new investment property.
Investing in a single-family home located within a master planned community can also be a plus, as these communities often have amenities such as swimming pools, clubhouses, and pickleball or tennis courts, which can lead to higher rents.
3. Minimizing Damage during Tenant Move-In and Move-Out
Wider doorways and stairs in a rental property can make it easier for tenants to move in and out, reducing the likelihood of scuffs on the walls and the need for frequent repainting.
In recent years, flat-screen televisions are frequently mounted on walls. The space above a fireplace is a popular location for this. To eliminate the need for tenants to patch holes in the wall each time they move out, consider a home with a clearly defined TV wall.
4. Simplifying Life for the Property Manager and Tenant
When searching for a rental property, look for one where appliances, water heaters, and laundry facilities that may require maintenance are located on the ground floor. This makes it easier for service personnel to access the issue and minimizes damage to the walls and flooring.
If the home you are considering does not have double-paned windows, consider replacing the old windows with new ones in standard sizes, even if it requires some modifications to match. This will standardize the sizes of window coverings, making them easier and more affordable to replace. The new windows will also reduce outside noise and lower energy costs.
5. Ease of Maintenance for the Tenant
When evaluating a rental property, consider the durability and ease of maintenance of the home’s materials and finishes. For example, luxury vinyl flooring can last up to 25 years and is easy to clean, which is highly valued by renters, according to a recent consumer survey by the New Home Trends Institute. Renters also prefer flooring, countertops, and cabinets that are easy to care for to increase their chances of getting back their security deposit when they move out.
6. Choosing a Home for the Tenant, Not for Yourself
When searching for a single-family rental (SFR) property, it is important to keep in mind that you are purchasing the property for unknown tenants, whose tastes and needs may differ from yours. Instead of choosing a home with amenities that suit your personal lifestyle, select a home with more conventional features that are likely to appeal to potential tenants.
Understanding local demographics and tenant profiles can assist investors in making better choices when selecting rental properties. For example, you may prefer a quiet, adult-friendly neighborhood, but if your target area is popular among young families, you may want to look for properties that are close to schools and parks to attract families with children.
Consider the reasons why tenants are looking for a single-family home. Most are looking for extra space, privacy, and the ability to live without sharing walls with others. They also want a garage for parking and storage, a yard for their pets, and additional amenities such as a pool and flexible space, all without the need for a down payment.
7. Selecting the Right Tenant for Your Single-Family Rental Property
After finding the ideal rental property, the next step is to choose the right tenant to live there. You want someone who is honest, responsible, and will treat your investment property with respect, while consistently paying their rent on time.
The importance of conducting comprehensive credit reports and background screenings for prospective tenants cannot be emphasized enough. With a recent increase in application fraud, it is crucial to rely on a reliable source to verify that your applicant is financially responsible, has not been evicted, has no criminal or sex offender record, and does not write bad checks. Check out our other pieces on successful tenant screening processes.