Single-Family Rentals: It’s a Great Time to Be a Landlord
If you own one of the 18 million single-family rental homes in the US, these are good times indeed. More and more young families are finding them to be a great alternative to buying a home — partly because affordable starter homes are tough to find. Growing demand has been pushing up both rent and the value of rental homes. As more and more young families learn about this alternative to apartment living, they are finding single-family rental homes in virtually every market.
Single-family rentals make up more than one-third of all residential rental units but are an overlooked segment of the housing market, according to the Joint Center for Housing Studies. Rental demand from tenants is so strong that shortages of available rental properties have been pushing up single-family rents for the past two years. Like home prices, single-family rentals are now stabilizing.
Rent Expected to Continue to Rise
July data show a national rent increase of 3 percent compared to 2.7 percent in July 2017, according to CoreLogic’s Single Family Rent Index for the first half of 2018. Single-family rent prices climbed between 2010 and 2018 and have stabilized since February 2016, when the rate of rising rents peaked at 4.2 percent. In the first half of this year, rent price increases have slowed but still increased by 2.1 percent. With home prices projected to increase by 5.1 percent year over year from June 2018 to June 2019, national rent growth is also expected to continue its upward trend.
Rent growth varies significantly across metro areas, according to CoreLogic. Among the top 20 metros, Orlando had the highest year-over-year rent growth in July with an increase of 6.4 percent, followed by Las Vegas (+5.7 percent) and Tucson (+4.2 percent). With national employment growth of 1.6 percent, both Orlando and Las Vegas had strong year-over-year employment growth in July, with job gains of 4.3 percent and 3.9 percent, respectively. Seattle had the lowest year-over-year rent growth, increasing by 1.1 percent. While the growth rate in the national index has stabilized, some metro areas are showing large acceleration or deceleration compared to a year ago. In particular, rent growth in Orlando accelerated by 2.9 percentage points, while rent growth in Seattle decelerated by 3.1 percentage points.
Why Rental Homes Are Popular
Single-family rental homes provide young families an alternative while they wait out the housing price boom. First-time home buyers are the fastest growing demographic in home sales. Last year, 2.06 million first-time buyers bought homes, the most since 2006. In the past two years, the biggest increase in homeownership rate came from households headed by people under the age of 35.
Hundreds of thousands of potential buyers are still renting because the supply of affordable new homes for first-time homebuyers remains inadequate. Sales of new homes decreased at every price point between $150,000 and $300,000, meaning that fewer of the starter homes sought by first-time homebuyers are available.
Affordability, convenience, and flexibility are the primary reasons families are renting single-family homes, according to a survey by the University of California at Berkeley. While younger millennial renters (those under the age of 29) are significantly more likely to want to buy a home in the next 12 months, 63 percent of this age group say their inability to afford a home or down payment as the reason they are not interested in buying at this time.
Metro areas with limited new construction, low rental vacancies and strong local economies that attract new employees tend to have stronger rent growth. During the first half of the year, Orlando and Phoenix saw tremendous year-over-year rent price growth averaging 5.2 and 4.7 percent. Average employment growth in these areas exceeded the national rate, 1.6 percent, from January to June 2018 at 3.5 and 3.0 percent respectively. Rents in markets with recent hurricane damage like Houston, Texas and Wilmington, North Carolina will also see rents rising faster than national averages.
Investing in the SFR Boom
If you are thinking about investing in this booming business, there are options that didn’t exist just a few years ago. Financing a purchase is much easier today. More and more lenders are specializing in serving rental homeowners with financing options. Nor do you have to manage your tenants. Local property management companies can take care of your tenants and your property, and send you a check every month as rents roll in. Keeping your property rented is easier than ever. On national websites like Homes.com, you can list your rental to reach millions of both renters and buyers who live in your market or are planning to move there.
If you want to, today you can buy a rental home almost anywhere in the nation without leaving home and enjoy the financial rewards without ever visiting it. Companies like HomeUnion take care of search, financing, buying and selling, even finding a property management company to take care of your property. You don’t even have to buy a property to participate in the single-family rental business. HomeUnion recently launched a crowdfunding platform on new online markets like OwnAmerica where you can invest in portfolios of properties. You can even buy stock in real estate investment trusts that own thousands of single family rentals like American Homes 4 Rent and Invitation Homes on the New York Stock Exchange.
During the foreclosure crisis ten years ago, investors could pick up foreclosures at sheriff’s auctions for a song, and do well whether they flipped them or rented them out. Home prices today are at all-time highs. Economists expect that they will continue to appreciate over the balance of the year so that acquisition costs will remain higher for the foreseeable future.
The outlook for landlords is good for the foreseeable future, but not so for investors who want to buy into the single-family rental business. With home prices projected to increase by 5.1 percent year over year from June 2018 to June 2019, rent growth on a national basis is also expected to rise; but so will acquisition costs. Investors will do better buying now rather than a year from now. Though still rising, home prices are leveling off and may be flat a year from now. Investors who want to get in on rising values should buy sooner rather than later when markets across the country will be more favorable for young families living in rentals today but still have their sites set on becoming homeowners.