4 Reasons to Consider Single-Family Rental Investment
When someone thinks of investment in the residential arena of commercial real estate, the multifamily sector often comes to mind. This property type has gained widespread attention since the beginning of the housing crash in the mid-2000s, and it continues to be a major investment target.
Often overlooked, however, is another promising area of the residential market: single-family rentals (SFRs). The asset class has proven to offer consistent, stable returns and solid rent growth, encouraging increased investment in the space. Here are some reasons real estate investors should consider SFRs for their next investment opportunity.
The Market Keeps Growing
“[SFRs] comprise the fastest-growing segment of the housing market,” notes the University of California, Berkeley Terner Center For Housing Innovation’s report on the sector.
Between 1990 and 2016, single-family units made up more than three-quarters of new housing built in the country’s major markets. SFR stock has grown between 13% and 17% year-over-year since 2005, and by 2015, nearly one in five single-family homes were occupied by renters, according to the report.
This abundant supply has been met with just as strong demand. Many people are choosing to rent due to its relative affordability to homeownership and the flexibility it provides, the report noted. According to its national survey of single-family renters, 42.9% of respondents said they were renting because it was more affordable, convenient, provided flexibility, or allowed them access to a higher-quality neighborhood. Almost one in five respondents said they did not plan to own a home in the near future.
The SFR market’s growth is expected to continue because the barriers to owning a home are a perpetual challenge for many Americans.
Barriers to Homeownership are Extreme
It’s not easy for many in the United States to purchase a home, especially millennials. Even for young adult renters looking to own a home, financial constraints such as student loan debt are making it difficult to move into homeownership, according to a Pew Research Center report.
The share of young adult households with student debt doubled from 1998 to 2016. The median amount of debt was nearly 50% greater for millennials than Gen Xers when they were the same age, the report noted.
As a result, many young adults are delaying household formation and are living with their parents longer. In 2018, 15% of millennials (ages 25 to 37) lived with their parents. This is nearly double the share of baby boomers and the Silent Generation (8% each) and 6% higher than Gen Xers who did at the same age, the report noted.
Millennials are therefore lagging previous generations in terms of homeownership; In 1982, those under 35 had a homeownership rate of 41.2%, according to the U.S. Census Bureau. As of year-end 2018, the age group had a homeownership rate of 36.5%.
Another major issue facing young adults is saving the funds necessary for a down payment. Though they tend to have high-paying jobs, this generation often lives in metro areas with high costs of living. At the same time, home-buying prices continue to rise in many states, making the barrier to entry high for homeownership.
As millennials age and begin to start families, SFRs can provide a good balance of offering more space in higher-quality neighborhoods than an apartment, while posing less of a financial burden than owning a home.
Returns are Strong
SFRs have historically delivered steady returns and cash flows, making them an attractive asset class for investors. The average annual gross rental yield in the SFR arena was 8.8% at the start of 2019, according to a report from research firm ATTOM Data Solutions. The firm analyzed 432 counties across the United States. This was up slightly from the average of 8.7% reported one year ago.
Some might find it interesting that the potential for strongest returns was in cities not normally associated with hot commercial real estate markets. Counties with the highest potential annual gross rental yields included Baltimore City, MD, at 24.5%, followed by Bibb County, GA (21.9%), and Cumberland, NJ (21.2%), the report said.
While institutional players are active in the SFR space, small and midsize investors actually make up the largest share of investors in the market. Investors with one to two properties made up a 78% share of the SFR market, while those with three to five had an 8.5% share, ATTOM reported.
As the SFR space has matured and more financing options have become available, novice investors have greater access to capital in order to enter and expand into the market.
Strong and Stable Fundamentals
One highly attractive aspect of the SFR sector is its strong fundamentals. Rental rates jumped 3.1% in 2018, CoreLogic reported. Higher-end assets, which CoreLogic defines as properties with rent prices higher than 125% of the region’s median rent, saw a 2.9% increase. Lower-end assets (those with rent prices less than 75% of the region’s median rent) saw a 3.7% increase. Phoenix led all major metro areas with a 6.9% jump in rent growth.
The SFR market has also seen consistent vacancy rate decreases as rental demand remains steady. Since its peak of 10% in 2006, the national vacancy rate has consistently declined over the last 12 years, hitting 5.7% by the end of 2018, according to the U.S. Census Bureau Housing Vacancy Survey.
As an industry that is poised for continued growth due to a tough housing market, the SFR sector offers high returns, solid rents, and low vacancies that should entice investors to consider investing in the space.