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:
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:
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 | email@example.com | (323) 682-0371 | CalRE #02011050