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On February 12, 2020, the Dow Jones Industrial Average closed the day at $29,551.42. Fast forward exactly one month to March 12, 2020, when the coronavirus panic contributed to a drop to $21,200.62.
Looking at past performance leads me to believe the stock market will likely come back. But, the market is always a risk, and diversifying investments is crucial to long-term success. How can investors create a steady stream of revenue and build wealth at the same time?
In my extensive experience, single-family rental homes have proven to provide an excellent strategy. Monthly rent receivables can create positive cash flow, putting money in investors’ pockets now and helping build wealth by paying down principal.
Of course, there are many other real estate asset classes that provide investment opportunities, including office buildings, hotels, retail/shopping centers, industrial, warehouse/storage facilities and multifamily residential. However, many of these are beyond the reach of a small investor who has some savings and a 401(k). And many of these assets are even more risky, as evidenced by recent events.
Take hotel stocks, for example. The global pandemic has severely limited travel, triggering losses that major hotel chains will experience when the business and recreational travelers choose (or are forced) to stay home. It could take months for travel to resume at pre-crisis levels.
Retail and shopping centers, whether they are small strip malls or huge shopping centers with big-box retailers, have been losing tenants for a variety of reasons. Many small strip malls have small businesses such as dry cleaners, hair salons, restaurants, pizzerias and other mom and pop operations. A slow-down in business can cause delinquencies in rent and possible defaults, leading to evictions and bankruptcies. A strip mall owner or investor could be impacted significantly by ebbs and flows in the economy.
Offices are also often at the mercy of technology. More people working from home means fewer companies needing office space. Ultimately, this overcapacity may hurt landlords through lower rents.
So what makes single-family rental homes somewhat more resilient? Simple: Everyone needs a home, in good times and in bad. And, there are only two options when seeking housing. You can buy, or you can rent.
Unfortunately, owning a home is beyond many average Americans’ means. Millennials, born between 1981 and 1996, are beginning to grow out of the apartment rental phase as they are raising families and want something with four sides and a yard. But, millennials also carry the largest share of today’s record $1.64 trillion in student debt.
Single-family rental homes provide an option for debt-saddled millennials and are often more appealing than apartments to families of all ages. Families are also likely to want stability in their lives, making them ideal tenants for landlords looking for stable renters. With the right approach, single-family rental homes are a win for families and landlords alike. Families get that stability, and landlords get renters more likely to stay in a home longer and keep up on their payments regularly. This ultimately helps investor cash flow by creating stable, positive rental revenue.
So, if you are a small investor, how do you get started? My first residential real estate investment required only a $9,800 down payment. It’s possible to get started in this asset class without a massive capital outlay.
Once you have the money secured, what should you look for in a property? The same principles that apply to buying your own home also apply to buying a rental property — it comes down to location, location, location. Is the house located in a good school district? That still matters to families who rent. Is there room for kids to play in the yard? That matters, too.
Beyond that, families will look for recreational opportunities and outlets for their kids to grow and prosper. A rental in an area with those features will generate higher monthly revenue and home value growth for the investor.
Just like when buying your own home, you should look for a rental that is structurally sound, and if possible, one that features attractive amenities such as granite countertops and new carpeting. Renters are just as likely as buyers to be discerning consumers.
The economy is being negatively affected by the pandemic, which could make it harder for certain groups of Americans to purchase homes. Although mortgage rates are at an all-time low, qualifying for a mortgage still has a number of hurdles that some people just can’t clear. These same people still require homes. We can expect circumstances like these and myriad others to create a larger pool of potential renters, making the ownership of single-family rental houses one of the most promising opportunities for real estate investors in the coming years.