Single-Family Rentals: Deciding Where to Invest

Deciding in what metro areas to invest can be challenging, given the constantly changing dynamics of the single-family rental market and the residential housing market overall.

How does an investor determine in which markets to acquire single-family properties for rental and get the most return on investment?

According to Alex Hemani, President and CEO of Dallas-based ALNA Properties, investors should consider the cap-rate as far as rentals, where the growth markets are, and where the areas are that are expected to appreciate the most within those growth markets.

“You have to look at all of that,” Hemani said. “You also look at the business climate and the economy of those particular areas in the cities. Another thing you want to look at also is the discounts that you're getting. Are you getting any discounts, and if so, how much are they in those particular areas? All of those factors go in before making an acquisition decision.”

Once the decision is made as to which markets to invest, the next step is putting down boots on the ground, according to Hemani.

“You’ve got to have your own people there on the ground scouting the properties and building your infrastructure,” he said.

Analyzing data for a particular market is also critical when determining where to acquire single-family properties for rent. Hemani said his team leaves no stone unturned when it comes to analyzing data.

“There may be data that most investors are looking at from SFRIs, but we may look at whatever data is available, from whatever industry guide,” Hemani said. “It shouldn't just be specific because we're investing in that market, in that whole economy of that area. We have to look at everything. Any data we get our hands on, we want to look at.”

While some single-family rental investors are acquiring newly-built residential properties for rent, Hemani said his team deals exclusively in existing properties.

“You can make acquisitions on an existing property and capture some equity and get a ROI, cash on cash, or a good cap–rate,” Hemani said. “When those stop, then new builds will probably be the only option. As long as you're getting somewhat close to what you're looking to get, then you continue getting that, (existing homes) are a lot faster.”

John Burns, founder of John Burns Consulting and author of Big Shifts Ahead, said the majority of single-family rental investors still acquire mostly existing homes, despite the widely-reported shortage of existing homes for sale over the last several months.

“My clients are still buying them,” Burns said. “They're not in as much quantity as they used to be, but there are still enough homes on the market. One of the reasons people are finding that there are not enough homes for sale is that they're getting gobbled up by investors pretty quickly. Most of them are being bought all-cash, quickly closed, and it gives investors a competitive advantage.”