January 24, 2020

A step-by-step guide to finding cities with the best ROI for SFR portfolios

January 24, 2020
A step-by-step guide to finding cities with the best ROI for SFR portfolios

Here’s the data you need to pick the locations that will pay off in today’s market.

Building large portfolios of single-family rental (SFR) homes may be relatively new, but the principles are much the same as real estate investing throughout the ages. The three most important factors, as the saying goes, are location, location and location.

With 384 metropolitan areas and 39,044 municipalities in the United States, picking locations for an SFR portfolio can be a daunting task. (Most investors start by concentrating portfolios in a handful of markets—or even just one.)

And while there are published rankings of the hottest investment markets today—Charlotte, Orlando, and Las Vegas top many—for sophisticated investors those lists are no more useful than a table of hot stocks on a financial website. At Entera, we work with some of the savviest players in the SFR market and understand how to take a disciplined approach to choose ideal markets.

First, identify your investment objectives through careful self examination. Questions to ask might include:

  • What is your target balance between current yield and future capital appreciation?
  • What is your tolerance for risk?
  • What’s your thesis for how economic or social trends will change the housing market?

Second, gather information that will help screen metropolitan areas, municipalities and individual neighborhoods to find those that best fit into your strategy. This typically involves pulling together economic data, property records, real estate listings, school rankings and much more from dozens of sources. You can try to find all this information on your own or find a vendor that has already collected and organized the relevant data.  At Entera, for example, our database includes thousands of fields from more than 65 sources.With this information assembled, here are three key factors to consider when refining your list of investment markets.

Rent yield

The first way to categorize cities or neighborhoods is by average rental yields, i.e., average rent for the location divided by average sale price. On first glance, higher yields are more attractive. Look beyond the average gross yields, however, by looking for data that suggests above average operating costs:

  • Older housing stock. Renovations will cost more, maybe a lot more than you think.
  • High turnover rate. Renting to unstable population takes more effort.
  • Low occupancy rate. Think: Supply vs. demand.
  • High insurance costs. Waterfront views aren’t so lovely post hurricane.
  • Low average-income-to-rent levels. You need people who can afford your property.

Some investors, moreover, are looking beyond cash-on-cash return, the traditional focus in real estate. They are accepting low or even negative cash flow in return for the opportunity to profit from the surging residential real estate market in places like Northern California.

Housing supply and demand trends

Housing is a long-term asset and you’re looking for locations where rent, home prices or both will increase over time. Conversely, you may not want to buy into an area about to be glutted with new houses So look for indicators of the forces behind the supply and demand for single-family homes.  For example:

  • Population growth. More people = more demand.
  • Below-average unemployment. A strong job market = strong demand.
  • Wage Increases. More money to pay for rent hikes.
  • Announcements of major new offices, institutions or factories. See all of the above.
  • Percentage of single family homes for rent. A rising trend line might suggest problems.
  • Building permits issued/announcements of new home construction. Again, a rising trend line could mean falling demand.
  • Zoning regulations/geographic features that hamper new construction. Tighter limits benefit existing properties.

Neighborhood appeal

People have many different reasons for coveting certain neighborhoods and homes. So be creative as you assemble indicators that show the best locations to buy and rent houses for target customers. Factors to consider include:

  • School ratings.
  • Crime rate
  • Public transportation
  • Cultural attractions/recreation facilities
  • Natural beauty
  • Retail offerings
  • Neighborhood demographics

One last point. Don’t forget to supplement quantitative information with qualitative insight. If you don’t have an advisor with local experience, you’ll need to contact local real estate agents, economic development officials and other sources. They can help explain economic trends and neighborhood differences that don’t show up in the numbers. Once you’ve picked your cities and neighborhoods, you can then move on to finding specific properties to bid on. More on that to come.

Our AI-powered investment platform modernizes the way professional investors find, buy and operate real estate. Entera enables you to play bigger and execute against your investment goals in ways previously not possible.