21 July 2019

Ways to Profit From Renting Out Single Homes

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Two-and-a-half years into the U.S. housing recovery, the real-estate industry is rolling out new ways for individuals to invest in the property market. Brokers, property managers and others are helping buyers purchase houses in distant cities and manage them as rentals for a fee. Publicly traded trusts that collect rental income are selling shares to investors. And crowdfunding startups are matching buyers with willing lenders.

The latest deals often don't depend on home values going up, which sets them apart from the house-flipping strategies that cost many home buyers dearly when the market collapsed. Yet investors could still face losses if, for example, the economy weakens and renters can't keep up with their payments.

Those who buy a rental property and then need their money back down the road could also get burned. Unlike stocks, bonds and mutual funds that can be sold quickly, it can take months to unload a house even in a strong market. And if prices decline, investors may lose a chunk of principal for good.

Despite the risks, investors worried about pricey stocks and meager bond yields can be lured by the prospect of a steady income stream and average annual returns that could range from 5% to 15%, if things go well.

Here's what you need to know about making money in the rental market.

The Traditional Route 

Many investors become landlords on their own.

There are many benefits to going the traditional route. You get to choose the tenants, and you decide how much rent to charge them. You don't have to pay fees to a property manager, which can eat into your returns. But it also means taking on a lot of responsibility, both when buying the property and while owning it.

Would-be landlords should figure out whether they are paying a good price. That means knowing the market and hiring an inspector to determine what repairs a house may need. Buyers should lower their offer to account for expensive repairs such as to the roof or boiler.

Investors should also research the expected annual expenses, including property taxes, insurance and maintenance. Allow for the fact that property taxes and insurance rarely decline, and can sometimes spike suddenly.

Be prepared for worst-case scenarios, and study local laws. Landlords, for example, may have limited options if a tenant stops paying rent, and evictions can take months in some places.

One-Stop Shopping 

To many investors, doing all that work sounds hard. An expanding roster of real-estate firms promise to make the process easier—for a price.

Firms generally look for homes that have low prices, usually $60,000 to $150,000, but that have the potential to fetch relatively high rents. In addition to helping investors find a house to buy, the firms make it easier to invest far from home, including in markets where home prices may be lower.

But investors also surrender a great deal of control in such deals, particularly if they don't live nearby. They should consider visiting the property before purchasing it, or at least request extensive pictures of the home, including all the rooms, the roof and major appliances.

Research the local market, too. For example, investors can check the Bureau of Labor Statistics website to see whether the local unemployment rate is decreasing, which could suggest a smaller chance of renters falling behind on their payments.

There are other potential drawbacks. Fees can also add up. HomeUnion, for example, charges 1% of the purchase price annually as long as the investor owns the property. It also charges 7% to 10% of monthly rent when the home is occupied.

Investors should also plan to closely track a property manager's expenses and review receipts for repairs. In addition, investors should consider what could happen if the home is vacant or the renter doesn't pay. Some of the firms guarantee rent payments for a year, but even they make no long-term promises.

Taking Stock 

Investing in a home means placing a risky and concentrated bet. So does buying shares in a company that owns homes—but the price tag can be much lower.

Firms that own portfolios of single-family rentals are for the first time offering shares to the public through real-estate investment trusts, or REITs. Six REITs that are entirely or primarily focused on single-family homes have started trading publicly since the end of 2012.

Many of the properties were distressed homes purchased from banks at a discount, then repaired and rented out. Much of the rent the REITs collect gets passed on to investors. Shareholders must receive at least 90% of a REIT's taxable income in the form of dividends each year.

Investors should consider the risks of an investment that is so new. Before buying shares, investors should review a REIT's holdings by checking the firm's website and filings with the Securities and Exchange Commission.

The company's management can also be crucial. Returns could depend on the companies' access to capital and operating efficiency, among other factors.

Crowded House 

Crowdfunding—the practice of pooling small amounts of money from many investors—has helped budding entrepreneurs capture the imagination of strangers who combine to bankroll a dream.

Recently, home buyers who think they have found a promising fixer-upper have gotten into the act. New online crowdfunding platforms that focus on housing, such as Groundfloor, iFunding and Patch of Land, have launched over the past year or so. These firms consider pitches from borrowers who want to repair a home, then sell it or rent it.

The firms then post the approved projects online, listing the property, the requested loan amount, the interest rate the borrower will pay and the amount of time it will take the borrower to repay the loan.

But there are limits and risks to crowdfunding. In some cases, investors may only be able to participate if they live in the same state as the house. If borrowers default, the platforms say they can foreclose on the properties and sell them to make investors whole. Some will consider renting the property instead. But investors could be at risk if home prices fall or the economy falters—two possibilities that investors who lived through the financial crisis should know are all too real.

Click here to access the full article on The Wall Street Journal. 

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