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The Case for Professionally Investing in Single Family Homes

Do you it yourself, or have a professional do it for you? The question applies to the case for investing a professional managed fund of single-family homes (SFH).

In answering this question you need to consider whether you are knowledgable in all of the areas that could impact your property selection, whether you have the resources to build a diversified portfolio, and whether you have the time to manage the process, even if you use local property managers. I will discuss the use of local property managers in another post.

A sophisticated investor works with a professional manager to diversify his total investment portfolio by holding stocks, bonds, mutual funds, hedge funds, gold, oil… and real estate, among others. In turn, hedge funds and mutual funds each have their own managers who are subject matter experts in their investment area. Within the real estate category, if you choose to invest in single-family homes, a Fund may provide diversification by neighborhood, city, age of home, and lease terms.

According to a study from John Burns Real Estate Consulting, there are more than 14 million single-family rental homes (defined as properties with between one and four units) in the United States. The SFH market comprised more than 35% of all rental units, with a total market value of approximately $3 trillion.

The SFH market is huge, and growing as a percentage of all rental units. Yet less than 1% of single-family homes are investor-controlled. Here are seven reasons why you should consider becoming a “passive investor” in a professional portfolio of homes:

1. Fund Management Asks the Questions

Here's just a partial list of the topics you don't have to ask when considering where, when and how to invest in the SFH market:

What's the investment area’s unemployment rate? Who are the major industries and companies? What are the trending growth, rents, home values, and affordability in the neighborhood and city? How many distressed and/or foreclosed homes are nearby? What’s the current discount to peak value, average price, and median housing value growth and trends?

What is the percent of owners in the same home for more than five years, and what percent is owner occupied? What are the demographics…age, marital status, family size, nationality, population growth and trends in the area? What is the travel time to work, quality of education, quality of and proximity to shopping, parks, entertainment, highways, public transit, and crime rate in the neighborhood?

2. Fund Management Does the Property Evaluation

Do you have the time to personally evaluate five, ten, twenty, or 50 properties? A professional real estate fund specializes in evaluating the type and extent of renovation most likely to increase equity value and rent potential at the lowest investment.

3. Fund Management May Pay Less for a Property Than You Would

For inexperienced investors, paying too much for a property and/or going over budget on renovations may substantially reduce your returns.

4. Fund Management Does the Redevelopment

Do you want to get your hands dirty on properties that may be 1,000 or more miles away? A professionally managed Fund should have the ability to find and supervise experienced local contractors who do the redevelopment and renovation. So you don't have to renovate kitchens, bathrooms, doors, base trim, electrical, flooring, central air, furnaces, plumbing, windows and doors, roofing, siding, foundation, appliances, cabinetry, and landscaping.

5. Fund Management May More Likely to Provide Hands-On Servicing

A professionally managed Fund may likely have the size and scale to build and maintain relationships with key service providers. In a professionally managed Fund we have the ability to get better service from our providers than a small investor, due to the size of our relationship and our buying power. This helps prompt our local managers to make sure our tenants and properties are taken care of promptly.

6. Fund Management May Provide Scale

For individual investors, a big challenge is the lack of economies of scale in managing a portfolio of rental properties. Owning 30 homes may be more cumbersome than managing one single family home. An individual investor can be burned if they have a small portfolio and they have trouble leasing one unit, or have a big unexpected repair. They could be forced to come out of pocket to cover the carrying costs of the property, whereas in a Fund there is diversification across a larger pool of properties which provides the ability to effectively manage reserves to mitigate that risk.

7. A Professional Investor May Have Access To More Favorable Loans

Financing real estate property can by challenging if you are buying just one investment home. However, professional investors – those who typically hold ten or more properties – may gain access to specialty lenders with more investor-friendly interest rates, payback schedules, and repair financing than typical bank financing. Additionally, individual investor financing typically requires that the loans be in the borrower's name with recourse to the investor; whereas in a professionally managed Fund the financing is in the Fund's name, and is not guaranteed by you.

For more information on why your should consider investing in a professionally managed portfolio of single family homes, please contact Harold Willig at 917-209-4452 or harold.willig@springviewinvestments.com

Harold Willig is the Manager of SpringView Investment Management, LLC, which he founded in 2012. Mr. Willig also served as HFZ Capital Group’s Chief Financial Officer, and was responsible for the oversight of HFZ's Finance and Accounting team. He has over 16 years of finance and accounting experience. Mr. Willig also ran a consulting practice and provided valuation, analysis, and transactional support services to multi-billion dollar real estate companies. Previously, Mr. Willig served as the Senior Controller and Vice President of Financial Analysis and then the Chief Financial Officer of the Athena Group, a multifamily development company and fund manager.

This post does not constitute investment, tax, legal, or real estate advice. It is not a recommendation or an offer to buy or sell. No warranties implied. Past performance does not guarantee similar future results.

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