By Fred Matera, CIO, Redwood Trust A lack of affordability will lead to near-term weakness,…
by Johns Prins, Originations Analyst
Real estate investors looking for quality investment opportunities in the Single Family Rental market are looking for a few key features in their investments. In this context, we most often hear about investors seeking cash flow which can offset property-level expenses such as property taxes, maintenance, management and insurance costs. The net cash flow is what dictates the value of real estate investments and produces the yield that investors receive during the term of the investment (based on the traditional “income approach”.) So, we can say that cash flow is pretty important.
However, beyond the tangible cash flow, there’s another focal point for real estate investors that perhaps can’t (or shouldn’t) be accounted for when modelling an investment—one that requires a bit of patience to realize, but pay off. What I’m referring to is property appreciation. Think about it. You’re building equity in an investment property over time, just like a home you reside in—building equity with each sequential mortgage payment and/or property improvement. Imagine each dollar you invest in the home has a return similar to that of an annuity—but rather than paying dividends periodically, the returns were more conceptual, compounding until you choose to sell the asset(s), at which point, you realize the entirety of the return at once. Value appreciation boils down to buy low, sell high—perhaps more appropriately, buy lower, sell higher—meaning the price you sell an asset for, exceeds that in which you paid for it.
It’s a concept most real estate investors are familiar with, but may not emphasize enough, perhaps because there is a misconception that there’s a high level of uncertainty to it. The truth is, like most things in life—there is uncertainty—but, if you look closely at the following features of your investment properties, you’ll put yourself in the right position to realize the appreciation, and find the ‘appreciation sweet spot’—whether it’s with one, five, or fifty rental properties.
- Simple, Cost-Efficient Property Improvements — Above, I touched on the delayed, compounding return on investment that is your monthly mortgage payments as it pertains to property appreciation. An easy way to accelerate those potential returns from your investment property(s) and might even justify bumping up monthly rents are simple, cost-efficient property improvements. Small improvements to your rental can play a big role in appreciation—and can be conducted as needed, retroactively, to avoid large lump sum investments all at once. Imagine after years of wear-and-tear, your rental is in need of a new roof. Instead of patching the roof for the cheap, short-term fix—you replace the roof with a new, more durable and aesthetically appealing alternative. Now imagine the $5,000 you invested in the roof, in a few years when you decide to sell the home—allows you to tag on $10,000 to the sales price because of its external curb appeal—cha-ching! Be cautious, though—look for value-oriented improvements that make sense for your rental, avoid overt customization and remain stylistically consistent with the changes you make—if done right, these changes can reap tremendous benefits.
- Location, (location, location) — Whether you have heard the colloquial phrase from your high school professor when choosing assigned seats on the first day of the semester, or from your realtor when shopping for your family’s first home—you’ve probably heard it before, and would be wise to remain familiar with. In the context of rental homes, it’s a component that remains ‘fixed.’ Fixed, meaning, the house you purchase can age and rot—or be rehabbed and made into a palace—but guess what? No matter the changes that come with time, that house will still be a short walk to the quaint main street of shopping and dining in town—or a stone’s throw from the highly regarded elementary school—and that will not change. Think about it in terms of simple supply-and-demand principal—there can only be so many homes in proximity to these desirable destinations, so as popularity grows, so does the value of your location. Don’t forget though—this can also work reciprocally—buy a home sandwiched between the local cemetery and train tracks—and you can’t pick it up and move it…
Whether you’re a seasoned real estate investor in the SFR space, or just getting started on your first or second property—be sure to account for the intangible benefit that is property appreciation—and perhaps more importantly, do your research up front (especially pertaining to location!), and approach property improvements and maintenance wisely—as if you do—you will likely be rewarded.
Ready to make the most of the appreciation sweet spot by growing or refinancing your rental portfolio? CoreVest is a leading provider of financing solutions to residential real estate investors. Whether you need a rehab loan or a portfolio loan, CoreVest can provide competitive loan options. We provide attractive long-term debt products for stabilized rental portfolios as well as credit lines for new acquisitions. For more information about how Corevest can help grow your rental and rehab business, please call John Prins at 212.230.3341 or email email@example.com.