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Are Turnkey Rentals the New 60/40 Portfolio Alternative?

For decades, an investment portfolio composed of 60% stocks and 40% bonds has been the baseline recommendation of most financial planners and stockbrokers. Given the negative correlation between stocks and bonds, U.S. Treasuries and other fixed income securities have acted as a hedge, resulting in smaller portfolio losses compared with equity alone when stocks tumbled. 

This traditional 60-40 asset mix has produced one of the best risk-adjusted returns of the past four decades – 10.2% since 1980, according to the Financial Times. But with Treasury yields now around zero, and likely to stay there for years, those gains are in doubt. “And with yields so low, even small changes could lead to big price swings for Treasuries and potentially big losses if inflation rises,” the Times notes.

“I don’t think bonds can provide the standard historical returns investors are used to,” Morgan Stanley’s chief of cross-asset strategy in London told Bloomberg recently. “The starting yield is at a point where that type of return is just not possible. Investors are going to have to lower expectations of 60-40 portfolios, and will have to look elsewhere for what can be in the 40%.”

Most individual investors don’t have many options aside from dividend stocks and REITs, and those mean taking on more risk while also forgoing the negative correlation bonds have provided. Plus, most of the major REIT sectors are looking shaky in the post-pandemic world. 

A new asset class

What is an individual investor to do?

Let me suggest adding an asset class to your portfolio that has delivered steady returns over the last 15 years and typically is not correlated with the stock market: single-family rental properties (SFRs).

Many if not most investors don’t have the inclination to be a landlord. And of those who do, most have jobs and so don’t have the time to manage more than one or two properties. 

But that is no longer an impediment, thanks to turnkey investment properties.

Turnkey single-family rentals (SFRs) are newly renovated homes that are ready to rent out or may already have a tenant in place. You just need to “turn the key.” The firm that sells you the property charges a fee to take care of everything (including finding a new tenant when the necessary) and you collect the net rents as a passive investor.

Single-family home rentals are in demand from families for many reasons, not the least of which is the increasing unaffordability of homeownership. Single-family homes are generally larger than multi-family units, located in suburban areas, and provide green space. In addition, social distancing is much easier in a single-family home than in an apartment building. 

From the investor’s point of view, good SFRs are so popular that there are plenty of potential tenants ready to move in and pay promptly if a renter moves out or needs to be evicted.

Follow the money

In adding SFRs to your portfolio, you’ll be following the smart money. As the Wall Street Journal reported recently, “The pandemic has stoked demand among investors, who were already buying more than one of every 10 homes sold in the U.S. They started gorging on houses after the last recession served up millions of foreclosures, and they’ve kept buying despite rising home prices, wagering on a permanent suburban rental class.” 

The most popular SFR regions are in the South and Southwest, but some of the best places to invest are in the Great Lakes, according to the Journal article.

“Greater Cleveland has been one of the most profitable places in the country to flip houses and own rentals. The typical fix-and-flip project there, as elsewhere around the Great Lakes, sells for twice what it cost. The monthly rents collected often meet the landlord’s ideal of at least 1% of the purchase price.”

There are local independent turnkey real estate firms in most major cities as well as national multiple listing platforms. Here are four steps you should take to mitigate the risks.

  1. Do your due diligence to find a turnkey provider with a proven track record. You want to see returning customers.
  2. If possible, check out the property you are going to purchase in person, not just online. 
  3. Read the contract carefully to be sure you understand what the turnkey firm is responsible for and what, if anything, you will be responsible for.
  4. Only buy properties that will have a qualified tenant in place. 

Owning a single family rental used to mean having to deal with the dreaded late night, “The bathroom flooded” phone call from your tenant. That is not a worry when you add turnkey investment properties to your portfolio. The new 60/40 maybe 60/20/20.

Tom Ott is director of investor relations at Smartland.

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