Through the ups and downs of the pandemic, one real estate asset class has emerged on top: single-family rental properties. In the past, commercial real estate investors have looked down on the humble single-family home. After all, they were only familiar with management horror stories and the headaches of a bad HGTV fix-and-flip.
The thought was that single-family rentals were too involved and not as scalable as other types of real estate.
We’re seeing those tables turn, however, as even commercial investors have set their sights on SFRs since the pandemic jostled the market. While some varieties of commercial real estate still performed, storefronts and office spaces suffered. The need for remote work combined with a shift in amenity priorities put many investors in a bind. Experts expect that this sector will continue to be volatile as the market recovers and the world returns, at least in part, to normal.
The single-family rental industry, by contrast, is as vibrant as ever. Mortgage Professional America called the demand for SFRs “ravenous.” While the market is not without its risks, the opportunity to buy properties at low interest rates in a high-demand atmosphere makes the single-family rental tough to ignore.
3 Factors Behind SFR Popularity
Stability
Part of what makes the single-family such an attractive investment is its long-term stability. Real estate is one of those time-tested and reliable investments that has proven itself time and time again. SFRs are particularly beneficial because they can serve an investor in any market condition. They can reap the rewards of passive income, growing equity, and tax benefits while renting the property. If a time comes where it makes more sense to sell, the owner can do just that.
If the COVID-19 pandemic revealed anything about real estate to us, it is the enduring demand for single-family properties. With a migration towards the suburbs and a desire for more space and square footage, SFRs became — quite literally — prime real estate in an inventory-strapped market.
As a long-term, buy-and-hold investment strategy, SFRs are meant to last by design. They are less impacted by the sway of the market cycle and, under the right management time, can see decades of success.
Demand
We already touched on the rising demand for single-family rentals. Because we’re amid a nationwide housing shortage, rental properties help fill some of the housing demand. Where we’ve seen the most demand, of course, is for single-family properties. The demand for SFRs has grown in the wake of the pandemic because households found themselves prioritizing different amenities. Working from home, schooling from home, and a need for private outdoor spaces incentivized many to move away from crowded urban centers and into the suburbs.
With housing inventory so short of demand, it only makes sense that renting a single-family home becomes the ideal alternative. For some, renting is better than homeownership. With the future of working from home in question, the flexibility of renting means that American workers can move when they need to without being saddled with a property to sell.
Accessibility
Despite inventory issues and rising home prices, single-family rentals remain one of the more accessible investments. By leveraging debt, investors can minimize the amount of their own money needed to start investing. The help of new technology, turnkey companies, and professional management teams minimize the investor’s need to know and do everything. This lowers the barrier to entry in terms of experience.
SFRs are also advantageous in terms of exit strategies. Selling a detached residential property is much easier than selling an apartment building or commercial property. The pool of potential buyers is simply larger.
Are SFRs Overvalued?
GlobeSt raises a question. Are single-family rental values too inflated? It’s true, we are in the midst of an affordability crisis. The cost of renting has grown across every price point since 2010. Where we see this being a problem is that the largest price gains have consistently been in the low tier — which has put affordable housing at a shortage.
At the same time, price grows with demand. It should not surprise us that rents are on the rise for single-family rentals. Homeownership is becoming not only less obtainable but less an integral part of the American Dream. The flexibility, amenities, and convenience of renting a single-family home are alluring to an increasing number of people. As more households choose to rent long-term rather than buying homes, we will continue to see the demand for single-family rentals grow.
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