Don’t Miss the Single-Family Rental Boom

by Steve CookSeptember 7, 2018

If you are looking for a way to diversify your investment portfolio and you want to take advantage of the national demand for housing, you might want to look into single-family rentals.

There’s nothing new about single-family home rentals. For decades, roughly 10 percent of the nation’s rental housing stock has consisted of stand-alone homes and condominiums rented to a single tenant, as opposed to multifamily rentals. The housing crash ten years ago created a boom in single-family rentals. Most of the millions of foreclosures caused by the crash were converted into rentals, driving up the percentage of renters living in single-family rentals (SFRs) to more than 47 million, or 43 percent of all renters. By 2015, the total share of residential rental properties represented by SFRs reached a new high of 57.1 percent.

Source: National Home Rental Council

Driving the SFR boom were bargain basement acquisition prices of foreclosures following the housing crash. When properties lost as much as 50 percent of their value, local investors saw a tremendous opportunity. Some 3.8 million homes changed from ownership to rental, and the stock of single-family rental homes increased nearly 34 percent between 2006 and 2015.

Over the past five years, as the recovery took hold and housing prices boomed, the economics of SFR investing have changed completely. Acquisitions were no longer cheap, but higher costs were offset by both rising rents and rising property values. Among the attractions of SFR investing are its dual sources of cash flow: rents and values of the underlying properties.

Paying the lowest possible acquisition costs remains a key to profitability even though fewer bargains are available today. Real estate brokers who specialize in foreclosures and “cash for houses” companies that buy houses from owners who want to sell quickly are good sources for potential rental properties. SFRs now account for 11.6 percent of all housing units.

Source: National Multifamily Housing Council

Rental Demand is Strong

Approximately 43 million families and individuals lived in rental housing as of mid-2015, a surge of roughly 30 percent from 2005. Moreover, the overall share of U.S. households that rent rose from 31 percent to 37 percent during that ten-year period.

The rise of renting is driven by more than just the well-documented swell of Millennials entering their 20s. The largest increase came from renters in their 50s and 60s, who added 4.3 million to their ranks from 2005 to 2015. Households aged 40 and over now account for the majority of all renters.

The housing crash generated renewed appreciation for the advantages of renting that will help sustain demand in the years ahead. Indeed, even as the homeownership rate stabilizes, renters are still likely to account for slightly more than a third of household growth. According to projections by the Joint Center on Housing Studies, the number of renter households will increase by nearly 500,000 annually over the ten years from 2015 to 2025—still a robust pace by historical standards.

Location, Location, Location

Ten years ago, nearly all single-family rentals were owned and managed by individual investors who lived nearby. Many of these “mom and pop” investors were in the home building or remodeling businesses and were skilled enough to do the necessary renovations themselves. Because they lived near their investments, these small investors also managed their properties.

Home prices, rents, and market trends vary greatly by location. Local economic drivers like employment, climate, proximity to centers of technology, military bases, universities and resort areas are just a few of the factors that impact demand for homes to buy or rent.

In recent years, companies like Roofnet and HomeUnion offer “turn-key” solutions to investors — financing, brokerage, and management services. Investors can find properties in the distant market that might offer better conditions for investing than what exists in their home market. They can buy an investment home across the country, finance the purchase and have it managed for them without leaving home.

A range of new services is making owning a single-family rental easier than ever. No longer are owners stuck with the burden of managing their properties. Across the nation, dozens of property management companies that specialize in serving the single-family rental market have sprung up. Many real estate brokerages offer management services as well. Both “hard money” lenders like banks and non-bank mortgage companies and “soft money” lenders help single-family owners access capital from small investors.

Finding tenants for single-family rentals is also much easier than it used to be. National real estate sites, including Homes.com, list rentals to attract tenants for single-family rental owners. Security search programs help landlords check out the credit of potential tenants in a matter of minutes.

Expert real estate data providers like CoreLogic, Local Market Monitor and Attom Data Solutions regularly rank markets for investors. Rankings often include metrics that measure the health of the local economy, such as income and employment data, real estate market metrics like home price trends and the ratio of home prices to rents. These services help investors locate markets that meet their investment goals.

Rents for lower-priced homes are rising faster than more expensive homes:

Source: CoreLogic

New Investment Vehicles

Not everyone has the $200,000 plus in cash or financing that it takes to buy a single-family rental today, yet they can still participate in the boom in single-family rentals.

All one has to do so is invest in Real Estate Investment Trusts that specialize in single family rentals. Stock in REITs like American Homes 4 Rent and Invitation Homes is traded on the New York Stock Exchange where individual investors can buy shares in these funds, which own hundreds of thousands of single family rentals.

Today individual investors can invest in funds backed by single-family rentals on a crowd-funding platform. HomeUnion recently launched a crowdfunding platform that will allow individual investors to buy into a fund that will seek to create a return by identifying single-family rental investment opportunities, improving the properties, increasing the rents, and potentially selling the properties to other investors. As single-family rentals grow to meet the demands of today’s renters, there’s no doubt individual investors will have even more ways to participate in the business.

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About The Author
Steve Cook
Steve Cook is editor and co-publisher of Real Estate Economy Watch. He is a member of the board of the National Association of Real Estate Editors and writes for several leading Web sites, including Inman News. From 1999 to 2007 he was vice president for public affairs at the National Association of Realtors.