Key Takeaways From My Research
What’s currently going on in the SFR (single-family rental) market?
- Inventory has drastically increased relative to other housing:
- Increase of 3.6M SFR units (31%) from 2007 to 2016
- Increase of 3.2M apartment units (14%) in the same period
- The total number of U.S. households has increased steadily, but almost all of the housing demand in recent years has been filled by rental units.
- Smaller metros have a higher proportion of SFRs (versus larger metros, which have more multifamily complexes).
- SFR rental growth led in Phoenix, Boston, and several large Texas metros.
Who is buying SFRs?
- Most buyers of single-family rentals hold fewer than 10 units.
- Of the 15+ million single-family rentals currently on the market, only 2% are owned by large investment firms, and about 45% belong to landlords who own just one unit.
How is the single-family rental boom impacting home-buying?
- The share of single-family homes being rented out jumped from about 13% in 2006 to 19% in 2016.
- Landlords compete at the lower-end of the market, for less expensive homes. This creates competition with first-time homebuyers. According to Zillow, “Almost 40 percent of rented single-family homes bought since 2012 are among the most affordable compared to 34% of single-family rental homes that were bought before the market crash.” This is forcing homebuyers out and creating more rental demand, perhaps correlating with the increase in supply.
- Said Zillow senior economist Aaron Terrazas, “The combination of foreclosures and growing rental demand following the housing crash was an attractive opportunity for investors—large and small—who were able to buy foreclosed homes and use them to meet the rental demand. At the same time, many long-time owners have opted to hold onto their homes as rentals even after they decide to move somewhere else.”
What’s happening in the tenant marketplace?
- In 2006, 31% of US households rented; today, over 36% of households rent; in 2000, prior to the housing boom, 33% of households were renters.
- Nationally, median rent for houses rose 1.3% from 2016-2017, while median rent for multifamily rose just 0.5%. Through the first half of 2018, median rent for SFRs rose 1.8% compared to 1.3% for multifamily compared to the first half of 2017 (I computed this manually right from Zillow’s database).
What’s driving tenant demand for single-family rentals?
- A little over half of the total number of single-family home rentals on the U.S. market are occupied by families—they offer space for families, privacy, and the kind of neighborhood desired.
- Houses are also the rental of choice for single people who want to share the cost of rent with other single roommates. This accounts for almost half of the renters living in single-family houses today.
- 45% of those who rent would prefer to rent a single-family rental, but only 28% can actually find a single-family home to rent (According to Zillow).
Single-Family Rental Market
There is a large and growing demand for detached single-family rentals, and while there is not nearly as much data on this, I suspect that town-home, duplex, triplex, and quadplex rental demand is growing at a pace somewhere between multifamily and single-family rental demand. Supply is not keeping up with this demand, which is why rents and prices have been growing quickly for the past several years.
Unlike other asset classes, much of the supply in the single-family rental space is owned and is being purchased by ordinary Americans—folks with less than 10 units owned make up more than 87% of the marketplace in buying single-family rentals. It’s likely that people like you and I are a significant and growing share of this marketplace.
I believe that the factors driving tenant demand for detached rentals (better neighborhoods, more square footage, bigger yards, etc.) will remain in place, even as fewer people might be able to purchase homes in a recessionary environment. This might lead to still greater demand for single-family rentals and continued strong returns for rental real estate investors.
While overall demand for homes and rental units may contract in a recessionary environment (as people move in with relatives or move in with roommates), I suspect that the price of homes is likely to bear the brunt of this impact. While fewer people will be able to buy homes, folks have to live somewhere, so the total number of renters is likely to either increase or remain flat relative to the number of homebuyers, which will likely decline.
A similar story is likely to unfold in an environment of rising interest rates. Rising interest rates will make mortgage payments more expensive, putting downward pressure on home price growth, but upward pressure on rents. Rising interest rates will not change the qualitative factors that currently make single-family rentals more appealing than multifamily rentals to tenants, but they will make it harder for your typical owner-occupant to make payments and actually purchase a home.
In fact, a recessionary environment in the U.S. housing market may actually increase the number of mom-and-pop rental property investors, as prices may fall or flatten, but rents may continue to rise or remain flat. This means that while folks may lose equity, their cash flow might be reasonably secure. And, of course, it may be easier to find rental properties that produce satisfactory cash flow at a great price in a recessionary environment.
I suspect that it is your typical homeowner, not your typical buy-and-hold rental property investor, who is at more risk of losing property to foreclosure in a recessionary environment when their primary or only source of income (their job) is no longer there.
Furthermore, assuming that rents remain at least relatively flat, many of those current investors with fewer than 10 properties (remember, these folks make up 87% of the single-family rental market) will have 30-year fixed-rate conventional mortgages. With a fixed-rate mortgage, small-time investors of single-family and small multifamily rental properties have reasonable odds of sustaining satisfactory cash flow in an environment of rising interest rates. About 90% of homebuyers chose fixed-rate mortgages in 2016.
While I don’t have the data to back this claim up, I suspect folks continue to largely opt for fixed-rate 30-year mortgages through the present and that a large majority of investors who have the option in the single-family and small multifamily space are choosing 30-year fixed-rate mortgages as well.
So, what could crush single-family rental investors?
While there are plenty of scenarios that could crush individual investors, I believe that one of the few market conditions that would systematically put a majority of investors at risk would be a period of heavy deflation, coupled with rising interest rates.
This would put downward pressure on rents and increase financing costs. This is one possible scenario where real estate investors may lose categorically—if rents fall, they lose equity, and their financing costs remain high. I believe this is an unlikely future scenario, looking at recent monetary policy. But you always have to be aware of what can kill your portfolio.
I invest in real estate personally because I believe that inflation is more likely than deflation and that prices and rents will rise over time. If I did not believe that, I would not be investing in real estate.