Single-Family

Will The 2020s Be The Decade of Single-Family Rental?

by David Howard
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The sector appears well-positioned to become an even more important option in the coming decade. As we enter a new decade, housing observers across the country are making predictions for what the next 10 years will bring. With structural factors like the shortage of affordable housing and high rental demand continuing to shape markets large and small, one sector that is poised to continue its momentum in the 2020s is single-family rental (SFR). Contrary to some misconceptions, SFR has been an ever-present part of the American housing economy, historically dominated by small investors who kept just a few additional properties as investments. In recent years, however, the single-family rental home industry has evolved into a credible, service-oriented real estate asset class. Investments made by industry companies have supported and energized communities across the country. Most important, SFR companies are committed to the individuals and families who depend on the industry for a home to call their own. No single factor is responsible for the industry’s recent growth. Rather, SFR represents the marriage of the right idea at the right time. Enabled by innovative new technology and the vision of the entrepreneurs who bet there was significant unmet demand for high-quality, professionally managed single-family rental homes, SFR has grown from a fledgling fraction of the housing market to an industry on the move. And with demand showing no signs of slowing, the sector is well-positioned to become an even more important option in housing markets across the country in the decade to come. A Renting Revolution While the misguided assumption persists that renters rent only because they can’t afford to be homeowners, more Americans today are renting for a variety of reasons. Among them are demographic shifts such as an aging population and young adults delaying major life decisions (e.g., marriage and having children). Some can’t easily get a mortgage. Others, particularly many baby boomers and millennials, enjoy the flexibility of not owning a home. That’s a major reason why the homeownership rate today is 64.1%, down from 69% in 2004. And, one in five Americans now say they don’t plan to buy a home in their lifetime. Many Americans are discovering that renting is an option that just makes sense. SFR’s rise did not happen in a vacuum. From streaming music services like Spotify to fashion offerings like Rent the Runway, American consumers are increasingly demanding the leasing lifestyle across economic sectors. As the millennial generation that prefers flexibility over stability ages and begins forming families, single-family rental has met a crucial need in the market. It offers more space and amenities than many apartments and at a more affordable price point than homeownership. A Tech-First Industry SFR has also benefited from new technology that has created efficiencies in professional property and portfolio management. This shift occurred in the multifamily rental industry decades before its introduction in the SFR industry for a simple reason. In an apartment building, a single property manager or staff person can manage an individual building with hundreds of units, or even a few buildings in the same neighborhood. It’s nearly impossible to do the same for a collection of homes spread out across an entire metropolitan area. But, SFR owner-operators have rebuilt systems from top to bottom, establishing what is essentially a mobile maintenance shop that can deploy a fleet of vans across an entire market using a digital inventory management system and route optimization software. From the moment a maintenance request comes in, it is slotted seamlessly into this network so it can be addressed quickly and efficiently. On the acquisitions side, SFR investors now have a treasure trove of data at their fingertips when evaluating a home for purchase. Rather than poring through public records or having to decide based on their gut instinct, today’s investor can look at a home listing and, with the click of a button, determine whether it will be a financially viable rental property. And once they make the decision to buy, SFR owner-operators can make an offer within hours of a home hitting the multiple listing service. Modernizing the Renter Experience Gone are the days of needing to put a check in the mail or tracking down a landlord living an hour and a half away to fix a broken pipe. From basics like paying rent and submitting maintenance requests online to futuristic perks like keyless entry and smart-home connectivity, SFR owner-operators are redefining what it means to be a renter. In doing so, they are making renting a more appealing option, one that more and more consumers are choosing over homeownership. Even if they eventually hope to own, SFR represents an important new housing option for Americans. And renting can help put working families on the path to homeownership until they are ready to make the choice to buy. The 2020s and Beyond Even though the SFR industry has seen significant evolution over the past few years, the sector still has plenty of room to innovate. Today, only 2% of all single-family rental homes are owned by professional SFR companies. With rental demand continuing to rise and four in five renters saying that renting is more affordable than owning, the industry is well-positioned to continue to thrive. With the housing market fully recovered and affordable housing stock in short supply, build-to-rent is one major trend to watch for in the coming decade, as many SFR operators have begun to build new units or partnered with homebuilders to do so. Thus, they can expand their portfolios and bring new housing units to the market, helping to alleviate shortages facing communities around the country. Don’t be surprised if, come 2030, the housing industry is looking back at the decade of single-family rental. n

An Introduction to the BRRRR Strategy

by Andrew Syrios
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The BRRRR approach isn’t sexy or quick, but it does provide a clear path for building wealth consistently and with lower risk. The BRRRR—Buy, Rehab, Rent, Refinance, Repeat—strategy is all the rage today in real estate investment. Essentially, the BRRRR strategy is just buy and hold, but it approaches real estate as a flipper would. The big difference is, of course, that instead of selling to convert the built-in equity into profit, the BRRRR investor refinances at the end of the process and uses that built-in equity as a down payment. Here are key points of the BRRRR strategy (and how it differs from flipping) to keep in mind. B – Buy “You make your money when you buy” is an old real estate adage. The BRRRR strategy is no different. Flippers like to use the “70% rule” for determining a strike price. This rule states that the most an investor should pay for a property is 70% of the After Repair Value minus the estimated rehab cost. The idea is that the remaining 30% will cover the real estate commission, closing costs and so forth while still leaving a healthy profit. For BRRRR properties, the 70% rule is also a pretty good rule of thumb. Since most banks will only go up to 75% on a refinance, aiming for 70% of the ARV leaves enough equity for the down payment, loan costs and a little wiggle room to spare. Although the goal of both BRRRR and flipping is to get about a 30% equity margin, that doesn’t mean you will be looking for the same kinds of properties. For flips, it’s generally better to aim at a higher class of property. For example, on a $100,000 house, a 30% margin doesn’t cover much extra. One unexpected expense will take a big chunk out of your profit margin. On the other hand, as properties get more expensive, they generally don’t cash flow nearly as well because there are fewer investors looking at such properties and more homeowners who don’t care about cash flow potential. Thus, they will bid up the property above the price it will cash flow. So, a $500,000 home, for example, will rarely cash flow if it has debt on it. R – Rehab The BRRRR strategy and flipping also differ in their approach to the way rehabs should be done. Namely, don’t overspend. With flipping, the goal should be to make the house shine. It should be something you would want to live in, given the opportunity. With the BRRRR strategy, however, the end user is a renter, not a homeowner. The house simply needs to be nice and functional. It shouldn’t amaze you, but you should at least be willing to live there if need be. So, think Formica countertops instead of granite countertops and similar materials for other upgrades. The only exception to this would be for luxury rentals, which is another topic entirely. R – Rent When it comes to management, the BRRRR strategy is like any other buy-and-hold strategy. But before you can refinance the property with a bank and get long-term debt on it, you will need the property to be rented and performing. Whether you choose to manage it yourself or hire a third-party management company is a topic for another article. What’s important to note is that this point cannot be overlooked. Many attempts at buy-and-hold have been ruined by insufficient tenant screening or poor property management in general. R – Refinance The final step, refinance, might mean paying off short-term debt or pulling out the money you put into purchase the property at the beginning. You may obtain upfront loans to purchase these properties. Others buy for cash. It is possible to get a bank loan, but no bank will lend more than 75% (or 80%, if you are lucky) of the cost you have into the property upon purchase. This means that if you buy the property correctly (for 70% of its market value), you will only have what amounts to a 52.5% LTV loan (75% loan X 70% market value). You will also have to pay the down payment in cash. As a result, you will want to refinance again on the back end. If you got a bank loan on the front, that will require two sets of loan origination fees, which is why we prefer private loans or buying for cash. Typically, community banks have the most interest in refinancing single-family investment properties, although larger banks may be an option too. Further, there are lending institutions that have opened in the last five years for the specific purpose of financing such properties. You may have to look through quite a few banks to find one that will do these types of loans, but there are plenty that will. In our experience, the best way to find such banks is to ask other successful investors who they have used. Finally, make sure to verify the “seasoning period” a bank requires. This period is how long the bank demands you have owned the property before it will lend on the appraised value versus your cost into the property. This period may range anywhere from as soon as the property is rented to two years. The goal should be a seasoning period of six months or less. R – Repeat Now that you’ve pulled all your money out and have a cash-flowing investment property with none of your own money in it, why not do it again? Important Considerations While, as noted, it is certainly possible to “BRRRR out” of any individual property and have no money left over, it should not be taken for granted. “No money down” investment strategies are highly difficult and preclude many investments as well as any room for mistakes. And, even seasoned investors make mistakes. So, while the BRRRR strategy has proven to be a great way to build a portfolio of rental properties with limited cash out of pocket,

Single-Family Rental Industry is Growing Up

by Daren Blomquist
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Single-family rental inventory is accessible to a broader pool of buyers. Wall Street-backed institutional investors have largely curtailed their acquisition of single- family rentals in recent years, but strong demand from medium-sized investors on Main Street and mom-and-pop investors on Wisteria Lane—the stereotypical suburban street made famous on the television show “Desperate Housewives”—is continuing to buoy this growing marketplace. “I’ve actually seen interest increase every year since about 2012 (when) the early adopters were coming in and buying properties in all kinds of markets,” said Marco Santarelli, owner of Norada Real Estate Investments, a Southern California-based company that helps investors find, purchase and manage turnkey single-family rental properties in more than 20 markets across the country. Santarelli said his company mostly works with busy professionals who want to create wealth and passive income through real estate investing. Hedge Funds No Longer House Hunting Meanwhile, institutional investors have largely faded from the picture when it comes to large-scale acquisitions, according to Santarelli, who noted that in the last six months he has not heard of any institutional investors picking up inventory in the markets where his company operates. “I do hear from local providers when (institutional investors) are in town buying, but I haven’t heard much lately,” said Santarelli, a 15-year veteran of the single-family rental market. “I haven’t heard anyone saying the hedge funds are back in town and they’re buying everything.” An analysis of public record sales data from ATTOM Data Solutions shows that 3.5% of single-family homes and condos sold so far in 2019 were purchased by investors buying 10 or more properties a year, down from 6% in 2018 and down from a peak of 8.4% in 2013. Institutional buyers such as Blackstone-backed Invitation Homes and American Homes 4 Rent purchased tens of thousands of foreclosure homes at or near the bottom of the housing downturn, converting those properties into rentals. Earlier this year, Blackstone sold more than $1 billion of its shares in Invitation Homes, which still owns more than 80,000 rental homes across the country. American Homes 4 Rent owned more than 52,000 single-family rental homes in 22 markets across the country as of June 2019, but in 2018 its total portfolio of homes grew by less than 1,500. Another wave of institutional buyers, including Amherst, Cerberus, Front Yard Residential, Pretium and Tricon American Homes, have continued to acquire substantial numbers of single-family rentals in recent years, but these outfits are still not acquiring at the volume of the first-wave institutional investors, as evidenced by the ATTOM data. Six-Month Waiting List for Single-Family Rentals Despite the receding wave of institutional investor acquisitions, the single-family rental marketplace has continued to expand, thanks in large part to the individual investors that Norada and other turnkey rental home providers target. Waiting lists as long as six months for prospective buyers of turnkey rental properties demonstrate this strong demand, according to Santarelli. “The challenge we have today is that there are a lot of investors interested in buying, and in a lot of the markets we and the local providers are having trouble finding inventory,” he said. “The easy pickings are gone. Now to find deals you have to market and farm areas.” Sellers Turning to Alternative SFR Marketplaces Online single-family rental platforms such as Roofstock and Renters Warehouse have also launched in recent years, giving individual investors another channel of access to turnkey single-family rental inventory, which often cannot be found on retail housing marketplaces such as Zillow and Realtor.com. Given the constraints of selling single-family rentals through traditional retail marketplaces, some sellers have also turned to alternative marketplaces, including online auction platforms that list thousands of single-family homes. Many of these homes are turnkey, income-producing opportunities that are also financeable. Rental Market Still Strong Alabama-based real estate investor Jared Garfield said a combination of strong demand for rentals and low supply has kept the rental market strong, even with the home sales slowdown that occurred when mortgage rates rose in late 2018 and early 2019. “Our rental vacancy rates are typically around 3%. If our property manager has 300 properties, we know that nine of them will be vacant at any time because the lease is up,” said Garfield, owner of ROI Turnkey, a company that buys, rehabs and resells rental-ready investment properties. “There’s been no building for 10, 12 years, so there is a shortage of supply. As long as there is a shortage of supply, it’s hard to see a downside for housing.” The strength of the U.S. rental market is evident in the latest homeownership and rental vacancy numbers from the U.S. Census Bureau. The nation’s homeownership rate dropped to 64.1% in the second quarter of 2019, its lowest level in nearly two years, while the average rental vacancy rate dropped to 6.8%, below the 10-year average of 8.1% and in stark contrast to the 9.6% average during the 2002-to-2007 housing boom, which was driven more by owner-occupant buyers than renters. Rental fundamentals are even stronger in some metro areas like Las Vegas. Homeownership rates there dropped to a nearly three-year low of 54.4% in the second quarter of 2019, while rental vacancy rates dropped to 4.8%, a new low as far back as at least 2015, according to the census bureau. Average rents for three-bedroom properties in Henderson, Nevada, have risen 5% annually over the last five years on average, according to an analysis of data from Collateral Analytics. That compares to average annual rent increase of 3% a year nationwide for three-bedroom properties over the same time period, according to data from the U.S. Department of Housing and Urban Development (HUD). “I like Henderson. It’s one of the safest cities in the country. It’s got one of the highest per capita incomes, one of the lowest number of people living under the poverty line, strong population growth,” said Santarelli. “The opportunities are out there; you just have to change where you’re looking,” he said. “You change the market, or you change

4 Things to Consider When Investing in Single-Family Homes

by Kendall Crawchuck
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Trends, opportunities and investment strategies for this growing asset class By Kendall Krawchuk Many real estate investors swear by multifamily investments, but investing in single-family homes can also be a great way to increase cash flow and your bottom line. For many, the single- family asset class is also a way to diversify their real estate portfolios. If you’re thinking about investing in single-family homes or single-family rentals, here are several trends, opportunities and strategies to consider. 1. Demand remains strong, but affordability is still a concern The landscape for investing in single-family homes and rentals will likely be cautiously optimistic. Demand remains strong. A recent survey by Trulia reveals an increase in the number of Americans planning to buy a home, with 40% intending to buy in the next two years. However, the issue of affordability continues to trouble potential homebuyers. More than half are concerned about saving enough for a down payment, a rate that is even higher among millennials, now the largest demographic cohort of homebuyers. Investors will also need to navigate rising median and mean prices, despite the slight uptick in inventory at the end of 2018. Because of this, we expect to see increased activity in more affordable markets. 2. There’s a growing demand for single-family rentals With affordability still a concern, more and more consumers are deciding to rent. This is particularly true among millennials, whose confidence in being able to save for a down payment is at its lowest level since 2011. Yet as millennials start to have families of their own, their needs are outgrowing traditional apartments or even 1- and 2-bedroom rentals. Many single-family rentals are being outfitted with updates attractive to younger families, such as energy-efficient amenities, open floor plans and green spaces. This demographic shift may be one factor driving the increased demand for single-family rentals and subsequent spike in rent prices in 2019. We anticipate that the remainder of 2019 will offer even more single-family investor opportunities to buy, rent, refinance or sell to turnkey owners seeking these single-family rental properties. 3. Off-market properties and overlooked markets may provide new opportunities for investors Competition is growing on the buy side of single- family home real estate investing, with institutional investors selling off considerable portions of their portfolios. And platforms like Opendoor, Knock and Offerpad are attracting busy homeowners looking to sell quickly. Investors should seek creative solutions in a crowded buying landscape. One notable shift in 2018 is many buyers who are investing in single-family homes are increasingly willing to acquire fixer-uppers from channels like the MLS. So, for some investors, it may make sense to develop a robust system for sourcing off-market properties. Single-family home investors should also consider overlooked markets The largest and most overcrowded—San Jose, San Francisco and Seattle—saw the greatest decline in prices at 2018 year-end, yet many experts still consider them overpriced. 4. Many people investing in single-family homes use financing to respond more quickly to market changes Many predicted 2018 to be the most competitive homebuying year in history, and yet the year ended with a slight cool down in activity and rise in inventory, particularly in the largest markets. Through the remainder of 2019, investors should prepare for longer timelines to sell and budget for either holding the property longer or anticipate selling at lower prices. Finding the right balance between the two will best prepare them for movements in the market. Similarly, single-family home investors should also consider financing partners who are set up to close on properties quickly and to deftly respond to changes in the industry. The success of many investors will largely depend on their ability to move quickly and find creative solutions to market shifts in 2019 and beyond.

The Exurbs are Returning, But Not Necessarily for the Right Reasons

by Katia Potapov
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The exurbs, a region where people live in a metropolitan area outside the main city and suburbs, showed the most substantial gains in single-family home growth, according to a report the National Association of Home Builders released during the final week of May.