The Evolution of the Single-Family Rental
Investors Need to Plan for the Economic Shift Everyone is Feeling Right Now
By David Hicks
Real estate investing can be a great way to curate long-term, and even generational, wealth. The most common type of real estate investment is single-family rental (SFR) – as opposed to multi-family or commercial properties. Reportedly, there are 108.5 million Americans who rent their housing and 35% of those rentals are single-family homes.
Sure, those facts and figures are promising, but is this type of investment still a viable option? What does the future of SFR real estate look like? In the wake of COVID-19, the current inflation troubles, and the record high interest rates, landlords and property managers need to plan for the economic shift everyone is feeling right now.
There are a few factors to consider if you are contemplating the road to becoming a residential real estate tycoon.
What are Single-Family Rentals and Why are They So Popular?
By definition, a single-family rental is a home that is leased to a family or an individual. The property could be a standalone home, townhouse, flat, or apartment. Single-family homes are the most popular type of housing in the U.S. In fact, there were 82 million single-family units across the country in 2021.
Tenants tend to be attracted to this type of rental because they do not have to worry about caring for a house. Owning a home takes a lot of work and everything rests on the owner. When you rent, there is always someone you can call to fix a towel rack that may have fallen or update an appliance that gave out. SFR real estate allows families to live in quality homes in nice neighborhoods without the hassles of owning the property.
Plus, many single-family rentals have the amenities of a luxury apartment building, such as fitness centers or entertainment areas. These perks, coupled with extra outdoor space for families with small children or young couples with pets, make these types of rentals ideal.
COVID’s Impact on Single-Family Rentals
With the “zoom town” boom during the pandemic, the supply of homes for sale was not able to keep up with the demand – causing cutthroat bidding wars that resulted in houses being sold for much higher than the asking price. This accelerated the growth of SFR real estate.
Single-family rentals allow millennials — the smallest group of homeowners in the country — the chance to embrace the suburban lifestyle without having to drop a large down payment or feel the strain of a monthly mortgage.
With most of this demographic feeling the weight of resuming student loan payments, homeownership seems to be a far-off goal. Even if the Supreme Court rules in favor of President Biden’s student debt relief plan, many millennials may still have remaining balances to pay off. The interest-free forbearance, which has been extended nine times since March 2020, gave borrowers a chance to build their savings, just not for homes.
However, with more companies shifting to work-from-home or hybrid schedules, younger employees can move away from expensive city living to take advantage of more space for fewer dollars. Additionally, if young renters want to move to another part of the country in a few years’ time, they have more freedom to do so without the strings of homeownership. This is especially important to millennials who have different priorities than other generations. According to Business Insider, millennials are willing to spend $5,000 or more on a trip — making them the highest travel spenders. Millennials also travel more than any other generation, taking a whopping 35 days a year to get out of town. Generation X, baby boomers, and Generation Z all take less than a month with 26 days, 27 days, and 29 days devoted to travel, respectively.
The Future of Single-Family Rental Real Estate
Even before COVID, the single-family rental real estate market was faring well, and predictions show it is only going to grow. From 2019 to 2020, there was a 30% increase in build-to-rent single-family homes. These types of property management owned communities make up about 6% of the homes being constructed in the U.S. — a figure that is expected to double over the next decade.
It is also unlikely that renters will move on to buy a home anytime soon. Due to the high inflation rate — peaking at 7.11% last year — everyone is feeling a bit pinched for cash. In an effort to get a handle on the rising rate of inflation, the Federal Reserve has raised the federal funds rate seven times in the last year. Even though the inflation rate has started to come back down, the Fed is not planning to slow down the interest rate hikes. Hence, those invested in the residential real estate market may see an opportunity.
With soaring interest rates, potential homebuyers are attempting to save money by renewing their leases instead of purchasing a property. This gives landlords at least another year of steady cash flow before having to worry about finding another tenant.
Final Thoughts
It is important to note that you do not have to be a major property management company to generate wealth through single-family rental real estate. Anyone could be a real estate investor in the SFR market. The strategy is straightforward: you buy a home when property costs are low, make any updates or renovations to the property, and rent it. Over time, you can take advantage of increased rent costs and appreciation. When you are ready to sell the home, ideally, you will be selling when asking prices are high.
At the end of the day, your ability to properly maintain the home will be a big determining factor in its overall value. While there are other components to consider, such as location, type of home, amenities nearby, etc., fresh coats of paint and updated appliances can go a long way when it comes to deciding a rent or asking price.
Residential real estate can be a rewarding venture. You can grow your investment portfolio while simultaneously helping others have an affordable and comfortable place to live. When done properly, with pride put into the home, it can be a win-win for everyone involved.
