The single-family rental market has experienced dramatic changes over the last decade due to more consumers opting out of homeownership and higher rental costs due to an imbalance of supply and demand, but what does this mean for investors?
The homeownership rate has fallen to nearly a five-decade low, pushing the single-family rental market in America to new heights. The greater demand for single-family rental housing has resulted in an increase in the price of rents, which means greater opportunities for investors looking to either enter or expand in the single-family rental market.
“The single-family rental market remains strong across the U.S. as the homeownership rate continues to decline and a higher percentage of the population migrates to rental housing,” said Walter Charnoff, CEO of the RentRange business. “As the real estate market continues to improve, we are seeing significant rental price increases in many markets, which bodes well for investors in this space.”
The New York University Furman Center and Capital One's National Affordable Rental Housing Landscape report showed that between 2006 and 2014, the renter population grew while more renters faced difficulty finding affordable housing in the 11 largest metropolitan areas in the U.S. including Atlanta, Boston, Chicago, Dallas, Houston, Los Angeles, Miami, New York City, Philadelphia, San Francisco, and Washington, D.C.
With the uptick in rental demand, investors can expect their single-family rental acquisitions to continue growing.
“The underlying growth in the single-family residential asset class was an increase in renters, a decrease in house prices, a decrease in credit availability, and all of that led to opportunities for institutions,” said Brian Grow, managing director, RMBS with Morningstar Credit Ratings, which reports monthly on SFR securitizations. “They could go into areas and build technology to find undervalued homes. A lot of the renters that are filling these properties owned by single-borrower issuers (institutional investors) are borrowers who probably don’t fit the profile of someone who would take out a mortgage in this new environment or alternatively. They don’t want a mortgage because something happened when either they or someone they know were looking for a mortgage. That led to an increase in rentership and an increase in opportunities.”
According to the report, much of the growth in the renter populations occurred in the central cities and surrounding suburbs. In 2014, 22 million more people chose to rent in metro areas compared to 2006 numbers. However, while the renter populations within principal cities grew by more than nine million, much of the growth occurred outside of those cities. Renters n in the suburban areas outside principal cities grew by more than 12 million people between 2006 and 2014.
Single-family rental homes, in particular, grew most among renters, the data revealed. In the 11 largest metros, and in metros nationwide, more renters chose to live in a single-family home in 2014 than they did in 2006, with more than one in five renters living a single-family home in 2014 in all metros except for Boston and New York City.
“With continued turmoil in the securities markets, individual investors are increasingly looking to an alternative to low-yield bonds and risky stocks,” said Don Ganguly, CEO of HomeUnion. “The SFR market is not correlated to the securities market, and with the right research, investors can find high-yield investments in markets anchored by solid, diverse economies and favorable demographics.”
The report found that rental housing stock grew much faster than the ownership stock in all 11 metro areas, especially among single-family homes. Between 2006 and 2014, rental housing units increased 10 percent, and in six of the 11 largest metro areas, more rental single-family homes were added to the housing stock during this period compared to multifamily buildings, ultimately creating more opportunities for investors.
In all 11 metros, the rental populations grew faster than rental housing units between 2006 and 2014, the data showed.
“One of the most basic, but important, concepts in single-family rentals is simply to keep properties occupied and, as a result, cash flowing,” a report from Morningstar Credit Ratings said. “It is in the interest of single-family rental securitizations for property managers to keep properties occupied by maintaining high renewal rates.”
Click here to view the full report.