Single-Family Rental Industry is Growing Up
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 the neighborhood.”
