Single-family rentals are widely viewed as something of a paradox: the financial opportunity is enticing, but the operational issues give owners and managers pause.
Yet, for those early companies who have set things in motion on the single family side, the secret lies in careful deliberation and a well-defined geographic footprint.
For starters, it's all about choosing the right properties to offset the cost differences between managing a single-family rental and your average multifamily development.
“It’s certainly more expensive,” says Eric Workman, vice president of sales at Tinley Park, Ill.-based MACK companies. “How much more [expensive] brings into a significant number of factors. How good of a tenant type you have, how much work you do to the property to offset maintenance. It’s definitely more expensive.”
MACK follows the general rule of thumb that assets are no more than 30 minutes away from each other and its central hub. By setting this specific geographic focus, it's able to cut down on extraneous costs, like having property managers drive across town for emergency maintenance. Similarly, Oakland-based Waypoint American Homes abides by geographical rules, with properties located all within a 25-mile radius, at most.
“We buy thoughtfully,” says Doug Brien, Co-CEO and founder of Waypoint American Homes. “If we’re going to start buying, we’re committed to buying enough of critical mass to operate it efficiently. You see costs get out of control when you spread different homes spread across different markets."
Another benefit of managing 10 properties on the same block or buying into a master plan community, is in forging relationships with the neighborhood. Buying in bulk also helps with insurance costs.
“We’re seeing groups try to get to a certain size and scale because they can save money on their insurance expense by combining multiple properties on the policy, by extending the coverage limit across greater number of properties,” says Gabe Weinert, senior vice president at Irvine, Calif.-based Johnson Capital.
The demographic for single-family home rentals centers on families. Often, as in suburban entry-level locations, these are families that are potential first-time home buyers whose circumstances have prevented them from moving forward on their plans.
So, naturally, investors are buying foreclosed assets similar to what might have been a new family’s choosing. Picking the right distressed asset, however, is key to an efficient operation.
The homes should be constructed roughly around the same time, with similar styles to enable a more efficient management spread. And before buying, plenty of due diligence is required to ensure accurate underwriting and rehab budget.
“We typically spend more in terms of upfront construction,” Brien says. If you skimp on materials, it will hurt the business down the line.
But a scattered site portfolio has its perks: It can be quite a blessing when the units are not stacked on top of one another.
“You certainly get a good amount of diversity in portfolio,” Workman says. “When you have density, density in itself can create issues. If you have an event within the building, you’ve impacted every single tenant.”
That diversity adds another layer of variety for the tenant. A multifamily building is limited in floor plans, but having dozens more “unit” options available in an appropriate distance gives the renter more options. It also offers increased liquidity; you can constantly manage your portfolio and sell a few homes if needed, to optimize Return On Investment, as opposed to selling an entire building. Single-family rentals also tend to turnover less frequently.
From a single family perspective, human resources are a top priority; this is a people business. It’s as simple as visiting the property once a month, and keeping an eye on the property without disrupting your tenants’ life.
“Our tenants don’t think of their property manager as a return address on an envelope,” Workman says. “They’re not calling an 800 number to get someone on the other end of the line. You have to create an environment in which these tenants have a personal relationship with the staff.”