Spotting a Pocket of Opportunity

One of the primary risks with SFR investing is prolonged periods of vacancy, especially since all of the revenue is concentrated with a single tenant. So when we survey the rental market looking for pockets of opportunity, we look for what we call "rental velocity" within certain price points. We then visualize this data and hopefully spot something interesting or actionable.

For example, we regularly search for rentals in the Greater Los Angeles area that were on the market for less than 30 days (velocity) within a certain price range - in this case, we were searching for homes that rented for between $5,000 - $6,000 per month in under 30 days over the last 6 months. The search returned 175 homes that we visualize on a map:

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To back into a reasonable yield after expenses, we know we want to find homes selling around $1 million in areas that overlap the areas of rental velocity. That helps us focus our search for pockets of opportunity where homes regularly trade at that price, which we found in Westlake Village:

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This might not look like much to the untrained eye, but it’s speaking to us - that’s a fairly significant concentration for such a specific sub-market. So, the next question becomes: Are there any decent homes for sale around $1 million in that area that might make a good rental property? Of the 10 or so homes in the area that might fit, we like this one the best:

Why do we like it? It's large (4 bedrooms - 2,824 SF) with a good floorplan and nice kitchen.  It's in a great HOA built around a park, community center, and pool, and in a desirable school district - so perfect for families. It also comps well against other leases and sales in the area.

What does it need to maximize its rental potential? New, neutral carpets and paint - that green-on-green look has got to go - as well as removing the wallpaper in the master bath and replacing some of the dated light fixtures. With these easy updates, we think this home would quickly find a tenant at $5,800/month, delivering over $49,000/year in operating income at a 4.7% cap rate.  

As nerds with finance backgrounds, we love us some data, and truly enjoy running the numbers and finding the latest SFR hot spots like Westlake Village. We do this over and over again, with different ranges of lease rates, and use this graphical data to spot sub-market rental velocity and focus on areas and homes we feel present the most compelling investment case.

Allen Blankenship, Realtor® | SFR Investment Advisor | | (323) 682-0371 | CalRE #02011050

Who pays these kind of rents?

When I talk to people about luxury SFR investing, one of the first questions that often comes up is “Why would anybody pay so much to rent…why don’t they just buy?” I would have probably asked the same question before I got into this business and saw so many different reasons from such a diverse group of renters. While every situation is unique, here are a few common reasons why a well-qualified family or individual would rent a luxury home vs buy:

Relocation: The most common reason and the easiest to understand. We see this all the time - you get a great job offer and have to move quickly. You’ve never lived here and though you have an idea what part of town you like, you are hesitant to buy until you see how the logistics of your new life come together and you get a feel for the different neighborhoods. Renting is a great option in this case and a prudent decision, so you can get the lay of the land and really feel confident about location when you are ready to find a home to buy. 

School Considerations: In Los Angeles, the quality of the public schools varies greatly and creates short-term incentives for families to reside in a certain area, even if they don’t want to live there longer-term. We’ve seen many instances of families renting homes so their children can attend a certain school, while they still own a home in another part of town that they rent out to other tenants. Sounds a little crazy to some people…but no more crazy than paying private school tuition in a town that actually has great public schools.

Home Buyer Fatigue: The extreme lack of inventory - particularly in prime Westside L.A. markets - has created bidding wars, lots of lost deals, hours of wasted time…and ultimately, fatigue on the part of would-be buyers with the whole process. Many times, these home searches were triggered by life events - a new baby, a parent moving in - and those situations have not changed. After months and even years at this point, we’ve seen many would-be buyers simply throw up their hands and sign a lease to finally get the space or location they need or desire. 

Convenience: With home ownership, comes a fair amount of responsibility that some people just don't have the bandwidth for. We work with brilliant entrepreneurs, artists, and other intense professionals for whom the sheer convenience of leasing is all that matters. 

Renting The Dream: For many people from outside of Southern California, they dream about living our enviable lifestyle for a while. For those with the means and desire to live that dream for a year or two, renting is a great option.

A quick search of the Southern California MLS shows 1,498 executed SFR leases over $5,000/month in just the last 6 months. These leases are typically signed by very well-qualified tenants, providing some of the safest income in the SFR category. While most higher income families and individuals will eventually buy their own home or homes, many will opt to lease SFRs for various reasons at different times, providing cash flow and building equity for their landlords.

Allen Blankenship, Realtor® | SFR Investment Advisor | | (323) 682-0371 | CalRE #02011050