Why Single-Family Rentals Are the New Dominant Investment
In a landscape marked by high mortgage rates, persistent inflation, and a severely limited housing supply, one might assume that investing in real estate is a risky proposition. However, an intriguing opportunity is emerging in the world of real estate investments, particularly in the single-family rental (SFR) market. Despite challenging conditions in other investment avenues like stocks and commercial real estate, single-fa
mily rentals are increasingly becoming an attractive prospect for investors with available capital.
The Rise of Single-Family Rentals
As Moody's Analytics Senior Economist Ermengarde Jabir points out, “Single-family rentals have experienced a resurgence akin to a phoenix rising from the ashes.” This remarkable transformation began in the aftermath of the Great Financial Crisis and has continued to evolve. What was once the domain of individual property owners, colloquially known as "mom-and-pop" investors, saw the entry of institutional investors. This shift was triggered by the wave of foreclosures on single-family homes, which provided an investment opportunity.
While the multifamily rental market has witnessed a slowdown in rent growth, the single-family rental market has displayed stability and marginal positive growth. This resilience is a result of the severe housing shortage across the country. Additionally, factors such as record home price appreciation have made homeownership increasingly unattainable for millennials, which has driven demand for single-family rentals leading to higher rental income.
Why Single-Family Rentals Shine
Several key factors contribute to the success of the single-family rental market:
Affordability Challenges: Rising home prices, which soared by over 40% during the pandemic, and mortgage rates reaching 8% (compared to around 3% in the past) have pushed people towards renting rather than buying. This trend has been especially beneficial for the single-family rental market.
Substitution Effect: Many individuals prefer living in a house, especially if they have children or specific lifestyle preferences. However, affordability constraints have forced them to opt for renting a single-family home, which offers the traditional American dream.
Higher Yields: Nationally, single-family rental gross yields are higher than multifamily capitalization rates. This indicates untapped value in the single-family rental market that remains attractive for investors.
Long-Term Growth: Builders are redirecting their resources from constructing single-family purchase homes to single-family rental properties. This shift is set to further tighten supply, bolstering the prospects for the single-family rental market.
Top Single-Family Rental Markets
Among metropolitan regions with populations of a million or more, Rochester, N.Y., leads the list of the top single-family rental markets based on gross yields. Rochester boasts an impressive 11.7% gross yield and a rent-to-list ratio of 0.19. This indicates a strong performance for single-family rentals in this region.
Notably, some of the top-performing markets, like Kansas City, MO, have a limited institutional presence, suggesting opportunities for individual investors. These markets are known for their affordability and a consistent need for housing, driving rental demand and higher rents. As an investor, these areas are worth considering when expanding your portfolio in the single-family rental market.
In a real estate landscape marked by turbulence, the single-family rental market is emerging as a beacon of opportunity. Its resilience in the face of affordability challenges, along with higher yields and long-term growth prospects, makes it an attractive investment avenue. As investors seek stable and profitable opportunities, single-family rentals are becoming the new superstars of the real estate investment world.
If you are an out of state investor, check out my blog post discussing the important questions to ask turnkey providers.
Alena Botros, Single-family rentals are a ‘superstar’ bet right now and these 10 cities are the hottest investments, Finance - Quarterly Investment Guide, published October 19, 2023, https://fortune.c