What does a perfect SFR rental look like????

Question

I am having a hard time figuring out what an “ideal” rental property looks like. Does it need to cash flow a certain amount? Do I measure it by the cap rate? Cash on cash? A certain amount of equity in property? Would like to hear examples of others ideal rentals that they have purchased.

Jim K. · Answer

Grumble, grumble, grumble.This thread, once again, illustrates how much the reality of making money in SFR is often divorced from theories about it on this website.

The OP (who identifies himself as a realtor, appraiser, and investor) asks in the title, "What does a perfect SFR rental look like?"

This is what I started thinking of immediately:

1. Poured or block foundation, no major cracks or visible settling.

2. 2 bedrooms, 1 bath, +/- 1000 ft2, single soil stack construction.

3. Simple roof shape, conventional roof slope.

4. No large trees, no major rise in the possible path of the sewer line to the street.

5. Modern gutters.

6. Relatively flat lawn.

7. Brick veneer.

8. Up-to-date wiring.

9. Copper or PEX water supply.

10. ABS or PVC DWW.

11. Up-to-date windows.

12. Short chimney on roof peak.

13. Safe neighborhood with good lighting, high local participation in neighborhood watch program.

14. Easy drive to supermarkets, shopping centers, major traffic arteries, local job centers; access to public transportation.

Those are a few visible characteristics I look for when buying or remodeling single-family properties as rentals. They partially answer the question of what the thing would look like. Those characteristics help make me money. Conversely, the lack of those characteristics costs me money.

It's clear, though, for the OP, the phrase "looks like" is just a figure of speech here. He's interested in cash flow, cap rate, and equity in this question. What the thing actually looks like...that doesn't matter so much.

Nathan Gesner · Answer

@Vince Lucas First, real estate is pretty forgiving when it comes to investment mistakes...as long as you hold onto it and weather through the difficult times. I know people that bought investment property back in the 70s and 80s without doing any kind of analysis. They bought a property that was available, looked cute, and they had money to spend. Based purely on numbers, these were not good investments. They sucked as Landlords and hand many tenants fail to pay rent, trash the homes, etc. Despite all these negatives, they held on and made some really good money and are now selling them for nice profits.

That said, there is a better way and it's very simple. You analyze a property to verify the rent income will cover all your expenses, give you enough to set aside for future expenses (taxes, insurance, vacancy, repairs, and capital expenditures), and then still have a little left over (cash flow). BP has a ton of threads, podcasts, webinars, and blogs that explain how to analyze property very simply. It takes a little time at first but you'll get comfortable pretty quick.

How much cash flow should you aim for? You'll hear experienced investors say they want at least $200 a month but that's because they're experienced and can probably hold out for those deals. I think $100 is a more realistic goal for someone starting out. Again, there are many different factors that determine the level of risk you can tolerate (personal finances, income from other sources, etc.)

Steven Ko · Answer

@Vince Lucas neighborhood is a factor you can’t measure with money.  A/B will generally have less problems than C/D tenants.  For me, I rather give up some cash flow and go with a better location.  Whatever you’re willing to put up with will make certain scenarios more ideal to you.

Heath Ryans · Answer

@Vince Lucas an ideal property is user specific. My ideal property and your ideal property probably aren't the same. You have to sit down and decide what you want/need from a rental property.

Do you need X amount of cash flow per door to help hit a goal? Maybe to quit a day job or fund a certain lifestyle?

Do you need a certain percent return on your money to justify investing?

Do you need a certain level of safety net in your properties so you can sleep at night?

An example (not my personal) is a rental that provides $150/m in free cash flow, and a 12% Cash on cash if all money can't be recovered on a refinance or in the case of a down-payment on a turnkey.

Account Closed · Answer

@Vince Lucas

Any equity I have is very short-lived so it's not really sitting there. It's usually equity gained from a BRRRR'ing a property or due to purchasing below market value. Regardless of situation, I like to take any equity and leverage the property as quickly so I can move on to the next project.

Stan Butler · Answer

This is going to be very local to your market.  I have been buying and holding rentals for over 15 years now and I keep finding new criteria to improve.  Lets separate your question into 3 areas:  Financial, Location and Property

Financial:  For me it has to be a 1% deal or I am not going to touch it.  I can get higher if I go into more sketchy areas, but I am OK with 1% in specific locations.  Also, monthly HOA fees have killed many a potential deal.

Location:  I look for homes in the 2nd tier school districts.  The first tier is too expensive and I cannot meet my Financial target.  The third tier and below attracts a lower quality of tenant.  I am looking for families that want good schools but cannot save enough to buy a home.  I also find the turnover to be a lot less.

Property:  This is where I have really tweaked my criteria over time.  I only purchase homes on a slab with 1 HVAC unit, no basement.  I only look for HardiPlank siding, no stucco or LP. I study the lot now more carefully to assess water flow.  I want to avoid lots with trees near the house.

Steve Rozenberg · Answer

@Vince Lucas that is a tough question.. I would say that it all depends on your end goal of why your doing this.. Create what your life looks like at the end and then create the strategy to get you to that goal.

Everyone has different goals and strategies in life, I would be careful asking people what is or is not a good deal. Because what is a good deal for you could be a bad deal for them and vice versa... spend time to think about "why" your doing something and then the "How" will come after you know your destination.. many people (myself included) just jump in and figure it out as you go.. the problem is thats like jumping in the deep end of the water and then deciding you will learn to swim.. Your so busy trying to keep your head above water you make decisions based on emotions not logic or strategy and you become reactive in your thinking.. not a good way to build wealth for the long term i would suggest

Steven Ko · Answer

Did you make this post to feel better about yourself? People are giving you answers and the only thing you seem to respond with is how they’re wrong and you have a better idea.  Since we’re all wrong, Why don’t you tell us the ideal SFR?

Account Closed · Answer

@Vince Lucas

Fair question. I guess the way I see it is first and foremost, my goal is to generate ongoing passive income. While selling it would give me a little more capital, it's a one-time shot, whereas renting that particular property gives me an infinate cash-on-cash return.

Also, just because a property appraises at something doesn't mean it's a guarantee for what it will sell for. Also, there's no guarantee how long it would sit, and what my holding costs would add up to. Lastly, I would have to pay short term capital gains which would take a sizable chunk out of my profit.

But back to my first point as that's the main reason. In my opinion, if I have cash flow coming in every month and it didn't cost me anything, that's the ideal situation for my strategy.

Account Closed · Answer

@Vince Lucas

I don't sell because my business model is buy and hold. Most of my purchases are cash as well. For example of one of my properties was something like:

Cash Purchase + Cash Rehab = $55,000

Appraisal/ARV = $100,000

Cash-out Refi w/Lender @ 65% LTV = $65,000

Closing Costs: $5,000

Net $ back in my pocket: $60,000 (and I still have 35% equity in the property)

Make sense?

What does a perfect SFR rental look like????

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