Strategies to Consider When Finding and Acquiring SFR Properties
- Panelists at the IMN SFR Forum (West) discussed how factors like property age, acquisition costs and price appreciation factor into their acquisition strategies.
- Portfolio acquisitions can be beneficial in obtaining immediate cash flow, but larger deals are proving harder to find.
- Investors today have to be more sophisticated in repositioning properties to sell in order to achieve higher returns.
A combination of boots on the ground and the right technology platforms is the key to doing proper due diligence on SFR properties and closing successful SFR deals, panelists noted at the IMN SFR Forum (West) in Scottsdale, AZ.
“Boots on the ground, talking to people and building relationships in my mind…is still the best system out there,” noted panelist Tim Horvath of Real Wealth Network, which helps potential buyers identify and purchase SFR properties. Traditional techniques like cold calling and knocking on doors can still help investors find unique off-market deals.
Fellow panelist Tim Reilly of Radian agreed but added that technology helps make the process of property identification and valuation easier. His firm, for example, has technology that can provide an immediate property valuation and better assesses property value by seeing previous repairs that were done to an asset.
“At the end of the day, there’s nothing more potent than having a distributor network of agents and property inspectors to go out to the properties, especially in the rehab phase,” Reilly said. “A lot of technology can get you part or most of the way, but then accompanying that with a distributive network is extremely helpful.”
Factors to Consider in Due Diligence Process
Panelists also discussed how characteristics like property age, asset cost and price appreciation factor into evaluating SFR deals. The aging U.S. housing stock is certainly a consideration for many SFR buyers. However, the year of construction isn’t as important as the asset’s “effective age” or the number of repairs done to the properties.
“It’s really about how much more use will the property get between now and its full cycle of being utilized if that property’s been repaired,” Reilly noted. “Repairs trump age.”
Panelist John Halasz of US Home Aggregation agreed, noting that its essential to understand the property you’re buying, and get a comprehensive home inspection so you know what work needs to be completed. This allows investors to acquire an asset at a cost that will justify the rehab work and achieve the necessary return when looking to sell.
Halasz added that his firm specifically looks at markets with strong population in-migration and low unemployment, as well as a lack of supply and inventory that needs value-add repairs. This strategy ensures the firm can find inventory in all markets, despite fluctuations in home prices, he said.
In terms of price appreciation, several panelists noted that because their strategies mainly involve buying and repositioning SFR assets, appreciation is built into their business models.
“We want the neighborhood to get better, we’re improving the area, we’re buying vacant houses and fixing them up,” said Ben Prisbylla of RE360, an SFR homebuyer.
Halasz agreed, pointing out that taking properties that are decreasing in value and updating them will help improve the overall neighborhood and allow investors to raise rents and attract higher-quality tenants. Additionally, growing markets tend to have appreciation built into them naturally.
Benefits of Investing in Different Types of Assets
To finish off the panel, speakers discussed how they decide whether to buy single assets or portfolios and the pros and cons of different acquisition strategies. Panelist Edwin Sweeten of Premium Title, a provider of title and settlement services, noted that portfolio deals can be beneficial as they usually offer immediate cashflow because the assets are leased up. On the transaction side, acquisition and closing costs are typically lower because you’re achieving bulk premiums.
However, he noted that portfolio deals are becoming harder to find. As a result, some investors are turning to single-asset acquisitions. “Ultimately those one by ones turn into large portfolios,” he said.
Another acquisition strategy that panelists examined was buying distressed versus stabilized properties. Reilly observed that the stock of distressed assets, which many buyers bought up in the years following the financial crisis, has declined over the last few years. But there’s still a lot of deferred maintenance in the current inventory that fix-and-flip or fix-and-hold investors can take advantage of.
He added that investors today can no longer get away with making a “lipstick” upgrade, which typically involves minimal improvements.
“You have to be very sophisticated about what repairs are going to be to make sure you can get the same rent as other properties in the neighborhood,” Reilly observed.
Horvath added that there are also opportunities to acquire properties from investors who bought distressed assets in 2008 and are now looking to cash out.
Overall, opportunities abound for investors looking to acquire SFR properties, but providing proper due diligence and identifying the strategy that fits your goals is critical to be successful.