Single-Family Rental Investment: Finding the Right Fit
- Feb 11, 2014
By James Breitenstein, CFA
Single-family rental investment is a relatively new but fast-maturing sector, and investors today are beginning to sort out the alternatives within the SFR category. What are some measures by which to evaluate those offerings?
In the aftermath of the recession many investors are apprehensive about investing in real estate, but in today’s environment the strength of the real estate recovery — in certain sectors and markets — is attracting once-skeptical investors. And for SFR, there’s the added layer of understanding this “new” category. But as with all real estate opportunities, the key is to do proper due diligence on the underlying real estate and on the investment structure or operator.
Large SFR companies are moving to become publicly-traded Real Estate Investment Trusts (REITs), which offers liquidity of owning stock across a wide swath of real estate. Many investors prefer to have direct title and involvement with their real estate investment, and understand enough about homes, neighborhoods and real estate to exert more direct decision-making.
Investors who prefer direct ownership in SFR are finding three types of structures today, each with important nuance and differentiation that will determine a proper fit:
Real Estate Agent-Structure: In this, most traditional structure of direct real estate investment, the investor chooses a city or neighborhood and an agent will find properties for sale that meet the criteria. They will help the investor to negotiate the offer with the seller, but they typically do not help them find the tenant, manage the property or other service after the transaction.
“Turnkey-Lite” Structure: A number of local/regional real estate firms are going one-better from the Agent structure by finding properties and then also offering a ‘turn-key’ package that may include identifying property, renovation/improvement contracting, and marketing to attract a tenant. The firm then screens tenants and arrange the start of the rental, but then turns over the responsibility of managing the property to the investor.
Full-service Turnkey Structure: The more robust, full-service turn-key approach takes things further by maintaining ongoing property management, resident relations, ongoing marketing for tenant replacement and other services to a level that the investor leaves most everything to the service firm, beyond ownership.
Another wrinkle now surfacing is SFR investment in entirely-new homes that are brought to market as rentals, versus the traditional model of renting out resale properties. We’ll dig into that topic in a next column.
Real estate is a somewhat straightforward investment that can help to decrease the volatility in an investor’s investment portfolio, and SFR properties offer yet another model for certain investors. Using proper due diligence, and levering the expertise of real estate investment professionals, an investor find the right fit for their objectives.
James Breitenstein, CFA, is CEO of Landsmith LP, www.landsmith.com.