There are a multitude of reasons why Wall Street has become an ever-increasing presence in the investment and operation of single family rental properties with some institutional investors now owning thousands of homes across the country.
For Wall Street and the prudent investor alike, it is almost a necessity to diversify capital by allocating a portion to the purchase of the best quality undervalued real estate at opportune times. As investors with portfolios of undervalued single-family rental properties, we ask the question: Is there truly any better asset class for the long-term investor?
From a quantitative perspective the ability to leverage 30-year fixed rates in the purchase and refinancing of undervalued single-family rental properties is one of the greatest advantages as an asset class and in finance. To quantify the intrinsic value of assets using a mix of the comparable sales approach, income approach (evaluating coverage ratios, loan to values, free cash flow margins/free cash flow yields, rent multipliers, cap rates etc) and replacement cost approach for like kind and comparable properties. And to identify and execute on the timely disconnect between the market price of single family homes and their respective intrinsic values.
From a qualitative perspective for identifying the location, class and condition of properties in large/growing markets (ample liquidity of buyers and sellers) with no rent control as being paramount to minimizing the possibility of a large loss of value through unfavorable changes in the locale or neighborhood.
And we understand from hard-earned experience as real estate investors that the quality of the tenant = quality of the returns. Effectively, the quality tenant should reduce your variable operating expenses by paying all utilities (individually metered), taking better care of the property (reducing repairs and maintenance), and by being less transitory (reducing vacancy). This often translates to higher free cash flows, higher coverage ratios, greater margins of safety and more favorable risk-adjusted returns.
Furthermore, the higher liquidity for single-family rental properties makes the process of purchasing and selling/liquidating an asset much more fluid. Anyone who has ever sold a large commercial real estate property understands the pain of selling those assets where liquidity is scarce.
The advantages of predictable free cash flow, depreciation, equity growth, liquidity and long-term capital appreciation combined with the ability to add leverage intelligently on the safest assets using a 30-year fixed loan is paramount.
As real estate investors seeking safety of principle and favorable risk-adjusted returns, The Practical Contrarian is armed with well-specified investment criteria and proprietary algorithms to identify single family rental properties that are priced in the market at a discount to their intrinsic value.
It’s key to understand that these favorable undervalued opportunities/inefficiencies present infrequently in the markets, and when they surface opportunities arise. With the right patience and discipline, the astute investor can build a sound portfolio of undervalued single family rental properties that promise long-term safety of capital and favorable risk-adjusted returns.
If you are a family office or institutional investor seeking to diversify a portion of your wealth in real estate, we are here to help guide you on that journey. Let’s Connect.