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5 Pros and Pitfalls Investors Face When Jumping Into Residential Real Estate

Residential real estate also provides investors with the opportunity to ... Not Doing Their 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 ...

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Authors: Dennis Spivey and Carter Jones in Daily Dose, Featured, Print Features January 12, 2018 0 This select print feature originally appeared in the January issue of MReport, available now. We are living in an era of self-driving cars and artificial intelligenceThe political climate is strenuous, but the stock markets are hitting record highsYet, through these technological advancements and unpredictable environments, residential real estate continues to be one of the most stable and attractive investmentsWhile most markets see commercial and large multifamily cap rates in the low single digits, single-family and small multi-family investment property in certain markets offer the chance to double and even triple those rates of returnConsequently, investors of all sizes are riding this wave and seeking to jump-start or further expand their portfoliosThe following tips will help you guide your clients in this space: Benefit Analysis: Top 5 Reasons to Invest in Residential Real Estate Range of Assets Within the residential real estate spectrum, there are a range of assets and property types available to investorsThis asset class is mainly driven by single-family residences, or SFRs, as they account for over 11 percent of the U.Shousing market and roughly 30 percent of total rental housingA broad definition of SFRs includes condominiums, townhouses, and small multi-family unitsThere are even sub types within residential real estateFor example, residential properties can be classified as either luxury or affordable housing, both of which have their distinct advantages and can provide a stable income streamResidential real estate also provides investors with the opportunity to own multiple properties at scale, such as a portfolio of SFRs across different cities, counties, or even statesInvestors can manage their portfolio to match their budget, goals, knowledge, and strengths. Flexibility and Ease of Ownership When compared to other investments, residential real estate is unique in the fact that it strikes an ideal balance between flexibility and ease of ownershipFor flexibility, property owners can be hands-on with their investment, make repairs, and add tangible value whenever they deem fitInversely, they can also choose to take a passive approach and hire third parties to manage their assets at a lower cost and much less complexity than a commercial asset, for exampleIn terms of ease of ownership, residential assets typically require much less capital in order to operateDuring operation, residential properties face less liability because they are not in the public eye and do not serve patrons, unlike commercial propertiesResidential lease terms are more straightforward due to simple lease structures, therefore making it easier to find tenantsThis ease of ownership makes the buy-and-hold strategy very attractive, as investors can increase their equity while receiving residual income. High Liquidity Unlike their commercial counterpart, the market for residential real estate is more liquidTypically, it is much easier to bring a residential asset to market than it is to sell an office building or retail centerFurthermore, the purchase of a residential property, say a townhome, is much less complicated than the purchase of a commercial propertyCurrently, there are more than 326 million people in the United StatesThat number increases every day, and thus, creates an everlasting market for residential real estateThis liquidity gives assurance to hesitant investors and confidence to those especially focused on the fix-and-flip strategy. High Rental Demand The rental market has been on a steady riseIn fact, it is at an all-time high and shows no sign of slowing downConversely, home ownership is losing its appealPeople do not necessarily associate buying a home with the American Dream, and demand for home ownership is at an all-time low at 63 percent, per the U.SCensusIn general, we are experiencing a large demographic and ideological shift in relation to homeownershipThe new working class, especially millennials, value flexibility in their occupation and change jobs more frequentlyThey don’t see a need to own a home and do not want to be locked into a traditional 30-year mortgage. Availability of Financing Debt can have a negative connotation and can intimidate potential investorsHowever, using debt to finance the acquisitions of residential investment properties is a great toolBeing able to leverage acquisitions dramatically increases the investor’s purchasing power, and allows the investor to expand their portfolio with easeAnother great option is the ability to refinanceRefinancing an asset or a portfolio’s debt enables the investor to realize any appreciation, and thus, use their additional proceeds to purchase more assets and expand their portfolioSpecialty lenders offer a large range of long-term and short-term loan products for residential real estate investors to refinance, acquire, fix and flip, or buy and hold. Learning From The Pros: 5 Common Pitfalls to Avoid While there are clear benefits as illustrated above, investors in the SFR market, as in any market, should take caution and build a clear offensive and defensive strategyMake sure your investor clients are aware of these five common pitfalls in owning single-family real estate and their fixes: Overimproving a Rental Property It’s tempting for investors who buy their first investment property to let their inner Martha Stewart out in every aspect—new floors here, new cabinets and granite over thereHowever, it’s important for them to be careful not to overspend when renovating their propertiesWhether it’s the client’s first house or their hundredth, it’s important for them to look at the market comps to see what improvements are needed, and more importantly, not needed in order to compete for tenantsKeep in mind that rental investors are not looking to resell their property, and the things that buyers look for (new appliances, expensive flooring, nice fixtures) may not be the things that lure potential tenantsInvestors should learn to salvage what they can while still bringing in light and using inconspicuous colors that appeal to the massesHaving said that, underimproving a property can also cause big headaches down the roadInvestors should 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. Not Doing Their Insurance Homework Sure, the affordable home in Tampa, Florida, looks like an easy investmentIt’s got solid rent potential and a price point that seems too good to be trueBut have your clients done their research on the property insurance that is recommended for the home? Some investors pay cash or obtain private/hard money financing to acquire homesThese scenarios often have relaxed requirements on insurance coverage, but also come with its risksWhile the temptation to “self-insure” seems like a lock to generate even more yield on investment, investors should be careful in considering the downsides of not having proper coverageFlood zones exist for a reason—because their house could succumb to a floodHurricanes are a real threatThe cost of proper coverage is something that needs to be factored into every purchase they makeInvestors should not cut corners and ignore these important safeguards for their property. Insufficient Title Searches Most investors know and work with title companies that help them diagnose a property’s legal healthWhile 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 homeInvestors should ask the title company to run city and municipal lien searches in addition to their normal searchesThere can often be unrecorded items outstanding that don’t show up on your initial owner’s policyTypical title policies often exclude these from their coverage, leaving the potential damages on the shoulder of investorsRemind them to look for a national title company and an experienced SFR rental title insurer to provide them with deeper and more comprehensive searches. Apprehension to Invest in New Markets It’s understandable that as real estate investors, your clients may look for opportunities only in their hometownIt makes sense, right? They know the neighborhoods, they can do their own repairs, they can meet with and filter all their tenantsWhile these are all positive things, they shouldn’t get trapped into thinking their local market is the only place where good investments existIn fact, they may find out that the city just down the road generates even higher yields than their hometownWith technology and the internet, the inventory of potential investments is at their fingertips 24/7Property management companies have also become experts at managing disparate assets spread across different neighborhoodsRemind your clients of the optionsDon’t let them leave the blinders on; help them expand their target markets and see how owning homes in different locations than they are used to can prove to be excellent investments as well. Not Understanding Financing Options Real estate investing is a game of scaleThe more properties investors own, the more they mitigate potential challenges such as vacancy and bad tenantsBut in order to scale properly, it’s important for them to consider using leverageWith the right lender and terms, financing can boost their returns and elevate their businesses to the next levelHowever, they shouldn’t trust just any bank or hard-money lenderRemind them to do their homework and find a private lender that excels and specializes in SFR rentalsBanks can be difficult (or impossible at times) to work with, and hard-money lenders can be very expensive. By knowing and understanding both the benefits and challenges to investing in real estate before diving in, your clients will save time, money, and headaches down the roadAs Zillow recently reported, the number of single-family homes that are rented grew by 5 million between 2006 and early 2017, so expect more clients to get into this investment space. homeowners Investors ownership real estate Residential 2018-01-12 Staff Writer tweet !function(d,s,id){var js,fjs=d.getElementsByTagName(s)[0];if(!d.getElementById(id)){js=d.createElement(s);;js.src="//";fjs.parentNode.insertBefore(js,fjs);}}(document,"script","twitter-wjs"); (function(d, s, id) { var js, fjs = d.getElementsByTagName(s)[0]; if (d.getElementById(id)) return; js = d.createElement(s); = id; js.src = "//"; fjs.parentNode.insertBefore(js, fjs); }(document, 'script', 'facebook-jssdk')); (function() { var po = document.createElement('script'); po.type = 'text/javascript'; po.async = true; po.src = ''; var s = document.getElementsByTagName('script')[0]; s.parentNode.insertBefore(po, s); })(); Previous: Going, Going, Gone… Home Sales to Increase in 2018 Next: Name your Price, Buyers Tell Homeowners About Author: Dennis Spivey Dennis Spivey is VP at CoreVest, the leading lender to residential real estate investors nationwideHe has more than 13 years’ experience in loan origination and finance, both in the retail and wholesale mortgage channelsSpivey began his career at Countrywide where he rose to become a Top 5 Account ExecutiveLater at Prospect Mortgage, he earned President’s Club status within a yearHis collective experience has helped him gain extensive knowledge in appraisals, valuation, underwriting, capital markets, and mortgage origination managementSpivey graduated cum laude from Pepperdine University in 2003 with a degree in business administrationTo reach Spivey, visit About Author: Carter Jones Leave a Reply Cancel reply Your email address will not be publishedRequired fields are marked *Comment Name *Email *Website Related Articles The Week Ahead: Bank of America Q4 Results January 14, 2018 Mortgage Apps Experience Year-Over-Year Rise January 12, 2018 Name your Price, Buyers Tell Homeowners January 12, 2018 Going, Going, Gone… Home Sales to Increase in 2018 January 11, 2018 Trump Administration’s CFPB Pick Backed by District Judge January 11, 2018 Eye on the Industry January 11, 2018 LEANDRA ENGLISH Trump Administration’s CFPB Pick Backed by District Judge January 11, 2018Author: David Wharton MOUNTAINVIEW FINANCIAL SOLUTIONS Situs Acquires MountainView Financial Solutions January 14, 2018Author: David Wharton RICK BECHTEL TD Bank Appoints Rick Bechtel and Scott Lindner January 14, 2018Author: Radhika Ojha INDUSTRY Eye on the Industry January 11, 2018Author: Radhika Ojha NAHB The Week Ahead: Bank of America Q4 Results January 14, 2018Author: Radhika Ojha COMPANY NEWS FHLBank San Francisco Launches $100 million Quality Jobs Program Program January 14, 2018Author: David Wharton Newsletter Thank you, your sign-up request was successful! 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