With home prices staying steady and housing supply remaining short, the single-family home rental market has persevered despite the COVID-19 pandemic and is expected to remain on solid footing into 2021, according to those involved in the industry.
Single-family home rentals are popular for many reasons, not the least of which is the large down payment obstacle that many potential homebuyers find economically daunting. Additionally, many younger homebuyers want the option of being able to move as their careers dictate and renting a single-family home both allows for this freedom and provides some of the amenities of buying but without the long-term commitments.
In addition, multifamily apartments are becoming less desirable among renters for several reasons:
- The oldest millennials reached age 40 this year. They are now in the prime family-formation years, so many want a place with a fenced back yard for their children and pets.
- With the pandemic continuing, social distancing and limiting human contact is still a concern among many. That’s much easier to do in a single-family home than in an apartment in a multi-family apartment building.
“People value good, quality housing now more than ever,” real estate investment entrepreneur Tim Herriage said.
The consensus among the experts that DS News interviewed is that the first two months of the year were strong, unemployment was low, the economy was good, and interest rates were low. But everything stopped short for the early part of the spring as the economy shut down in wake of the COVID-19 pandemic. However, for the SFR market, at least, the pause was short-lived before things began picking up again.
Jeff Tesch, CEO of RCN Capital, said that even before the pandemic hit, many investors who had concentrated on house-flipping had changed their investment strategy to focus on buying and fixing up SFRs for rentals because purchase prices had appreciated to the point that they could make more on renting a property than from flipping it in most cases.
Though interest rates for SFRs trended up as much as 200+ basis points since January, they have remained steady more recently and could trend down slightly by the end of the year. However, interest rates are unlikely to drop below the rate they were at when the year started, experts agree.
By the end of April, those with the access to capital were able to acquire distressed assets at 75 cents on the dollar, said Sanjay Raghavaraju, Founder and CEO of 33 Holdings.
Even with the uncertainty and high unemployment caused by the pandemic, rent collections are running only slightly behind where they were at the same time last year and occupancy has remained steady, said Mike Tamulevich, President, National Brokerage for Marketplace Homes.
Alex Offutt, Managing Director, Constructive Loans, pointed out that landlords can evict non-paying tenants easier than a mortgage holder can foreclose on a loan, so renters have kept up with payments better than mortgagees since the onset of the pandemic.
Alex Hemani, CEO of Alex Hemani Companies, added that, even if a renter needs to be evicted, SFRs are so popular that there are 10 other potential tenants ready to move in and pay promptly. “The inventory that is available is flying off the shelf.”
SFR buyer inquiries started picking up in July, said Jeff Cline, Executive Director of SVN | SFRhub Advisors. Investors had held on to their capital once the pandemic hit and are now looking to invest it again. But many commercial investments, including multifamily housing and office buildings, are expected to have poor returns as people look for places to live and work with lower population density.
In addition to higher interest rates, lenders have increased reserve requirements and have more enhanced requirements for rent collection histories, occupancy rates, etc., than they did in the first half of the year, Offutt said. He added that some lenders are more likely to favor experienced SFR investors and provide them with slightly better loan terms.
“There are three primary things that we look for in an investor when making loans: an investor’s experience, assets, and credit,” said Josh Craig, Chief Revenue Officer for Lima One Capital. The company evaluates the properties as well, looking at the value of each as a stand-alone property and how attractive it is to other landlords. Loan leverage is another consideration.
The demand for and income available from SFRs is expected to continue for several years due to continuing strong demand and a lack of supply.
According to the Urban Institute: “After completing a major demographic study projecting headship and homeownership rates through 2030, we concluded that demand for rental housing over the next 15 years will dramatically increase—and we as a nation are not prepared.”
Urban Institute’s analysis projects that from 2010–2030, the growth in rental households will exceed that of homeowners by 4 million, with an increase of 13 million rental households and 9 million homeowner households. That’s five renters for every three homeowners. Compared with the previous 20 years, the increase in homeowners was almost twice that of renters, even with the housing crash: 8.8 million new rental households and 16.1 million new homeowner households.
The Wheres and the Whys
The most popular SFR regions are south of the Mason-Dixon line. Cline cited Charlotte, Tennessee; Orlando and Tampa in Florida; Phoenix; and Las Vegas. Others added that areas around Dallas and Houston are also attractive. The movement south has been dictated largely by higher taxes in northern states, though there are still some attractive SFRs there as well.
Tesch added that, in addition to those southern cities, there are some northern cities like Columbus and Cleveland in Ohio, as well as Detroit, that have good job markets (some robotics-related industries have sprung up near Detroit), with workers needing affordable homes and preferring SFRs to multifamily rentals.
Properties further out from city centers tend to be more popular because they offer more space than in tightly packed urban areas, Tesch said.
There is some movement out to rural areas too, Offutt added. However, the rural areas need to have high-speed internet connections. “The biggest concern that capital has with rural areas is the lack of comparables for appraisals.”
The top considerations among potential tenants are properties that are in good neighborhoods with good school districts, experts agree.
As for the properties themselves, tenants and SFR buyers want homes with at least three bedrooms and two full bathrooms, according to experts. A fenced yard is another desirable option. While a house with a pool can command higher rent, it also has too much added liability and upkeep, experts agreed.
“With our company, we’re seeing increased demand for a renewed floor plan, with a closed-off kitchen and improved soundproofing,” Craig said. There is some demand for quiet office space, because many both within and outside of the SFR space expect the work-from-home trend that spiked during the height of the pandemic to continue. Homeworkers have proven to be more productive, according to many studies, and fewer workers in the office means companies can downsize expensive commercial spaces. Good internet connectivity is at more of a premium than ever before.
Renters and SFR owners also prefer countertops, floors, etc., that are easy to clean rather than higher-end surfaces that might be harder to maintain.
Renters and landlords alike prefer properties with easy access to parks, trails, and other outdoor amenities, Craig said.
The Build-for-Rent Factor
“Build-for-rent is really continuing to take off,” Cline said. Builders see a promising market due to the attractiveness of SFRs compared to multifamily and the challenges involved with homeownership.
“These are purposely built communities to be rentals long-term,” Cline said. “Most are designed to be mid-to-lower priced so they can be affordable. They’ll have slightly smaller square footage and slightly less interior finish (i.e., good, but not top-of-the line appliances, etc.) than a retail for-sale home.”
SFRs typically should return about 1% per month over expenses, many experts agreed. However, Tesch said that while that rate might be achievable for those who bought properties a few years ago, the acquisition cost has risen to the point that an 8–10% return is more realistic.
Some investors will accept a lower cash flow in exchange for better appreciation, Craig said.
“A lot of investors are looking at a 20- to 30-year plan. They can buy properties as a college savings plan for their children. You have positive cash flow, and you have a third party paying down your balance. You have good yields and tax advantages. Build-for-rent homes may achieve a 25% to 35% internal rate of return (IRR) in many markets,” Cline said.
Other SFR owners will invest in the properties for the option of renting or selling, depending on market conditions. If real estate prices are depressed, rental could offer the best return, but if prices appreciate sharply, then the best option may be to sell some properties, then purchase others when the market cools off again.
Depending on the property, rents can range anywhere from $1,400–$2,000 per month. Experts caution that charging higher rents will provide better returns but will also reduce the potential tenant base. If the rent is too high, the owner risks the property being vacant for an extended period.
Accessory Dwelling Units (ADUs) are gaining in popularity as homeowners with extra land look to maximize their rental income, said Seth Phillips, President of ADU Gold.
ADUs are dwellings like carriage houses, “granny flats,” or other separate dwelling units built on a property that already has a home in place. They are popular in areas where the cost of land is prohibitive, Phillips said.
They can enable the owner to greatly increase ROI because they’re building on “free” land, Phillips added. While rental income is the most popular goal, “it’s also a perfect opportunity for a family [different generations] living together with each having their own private space.”
However, only about two-thirds of states have approved ADUs.
While the property owner typically will live in the main unit, with the tenant in another, other owners will have two ADUs on one property and will live somewhere else. ADUs cannot be bought or sold separately from the main property.
Scaling an SFR Business
Butler offered the following tips for scaling an SFR business:
- Make sure that every deal supports itself.
- Keep your finger on the pulse of the business. Know your cash flow; check it monthly.
- To limit “playing whack-a-mole” when working with multiple properties, use a property management system.
However, scaling may be overrated, Herriage countered. He said it is more important to get good at owning one property, then two, then three. Otherwise, focusing on scaling will only expose the owner’s inefficiencies.
“Make sure you have a solid team in place,” Raghavaraju added.
Butler also stressed the value of education—not college courses, but real estate industry education. “I’ve probably spent $250,000 on education during the course of my career learning from experts. You need to do your homework”
While Butler admits there are some poor seminars, they can also prove to be valuable because an investor learns tactics not to pursue. He also found a broker’s license to be valuable.
Danny Kattan, Founder and CEO of Sell2Rent, said a broker can help an investor scale an SFR business, but it’s also essential to know what your leverage options are.
“You need to be organized with your borrowing,” Kattan said. “You have to realize that it will take time.”
“Set goals,” Butler added. “If you shoot for the moon and miss, you still land among the stars.”
Butler’s goal when he started his business was to make 20 offers a week, even though he had a full-time job. He eventually grew his business to the point where he could forgo the job. He advised those in the business today not to forgo other employment until their rental income is 1.5 times the amount they are making on a job.