As market demand increases for new rental developments, investors have an opportunity to capitalize on Single-family rentals (“SFRs”) due to changing consumer preferences in housing. With rents on track to outpace inflation as well as the overall commercial real estate market, the disparity between supply and demand means now may be an excellent time for investors to consider this asset class.
There are four important aspects that potential investors should bear in mind: 1) the Millennial housing mindset, 2) portfolio supplementation, 3) how SFR stacks up against multifamily, and 4) SFR community opportunities. We discuss each of these factors in greater detail below.
Housing Trends Among Millennials
Millennials seem to lack the same attachment to homeownership that Baby Boomers did at a similar age. Renters head more U.S. households than at any point since at least 1965. (Pew Research) Additional data indicates that 74% of Millennials prefer rentals, and this demographic accounts for half of U.S. households with children. (Pew Research) The Millennial inclination toward renting is motivated by an overwhelming debt burden and generational realignment of priorities. However, as Millennials begin to have children, apartments may no longer offer sufficient space. Single-family rental homes can provide an ideal option, because they combine the amenities of a home with the flexibility of renting.
The demand for SFR options by Millennials is further driven by a lack of for-sale housing affordability, caused by rising construction costs and constrained income growth. Since 2009, homeownership by families has declined by 3.6 million while the number of families renting has increased by 1.9 million. (CBS News) The national rental vacancy rate now stands at its lowest level since the mid-1990s. (U.S. Census Bureau) For supply to keep pace with demand, there will need to be an estimated average of 325,000 new apartment homes built each year. (National Apartment Association)
So what does the Millennial mindset mean for investors? SFRs offer the potential to capitalize on an undersupplied market sector that is growing quickly. With Generation Z soon to enter the mix as well, developers should see the potential benefit of building rental properties that meet the changing demands of modern families, similar to the multifamily boom in the early 2000s.
How SFRs Supplement a Portfolio
The real estate market has historically experienced fewer peaks and valleys than the stock market. Compared to equity investments, which are often subject to volatility and daily value fluctuations, real estate investments have historically tended to be less reactionary.
A key feature of real estate investing, particularly for an asset class like SFRs, is that a significant proportion of total return accrues from long-term rental income. For example, between 1977 and 2007, close to 80% of total U.S. real estate returns derived from income flows. (Investopedia) This characteristic has historically reduced volatility among investments relying on income return thanks to the continuous revenue stream provided by rental payments.
How SFRs Stack Up Against Other Real Estate Asset Classes
SFRs can be easier to manage than other real estate assets as well. Because tenants tend to feel a heightened sense of ownership, they are more likely to extend their leases and take better care of the property. With a spike in demand of 1.5 million units projected by 2022, investors may want to consider getting involved earlier rather than later in the SFR market. (National Rental Home Council)
SFRs enjoy an array of advantages over multifamily rentals, including a history of stronger rent growth, more stable occupancy, and higher yields. Rent growth for SFRs has outpaced multifamily rentals by 400 basis points since 2006, leading to higher capitalization rates and greater cash flow for investors. (Green Street Advisors, 2019)
SFR rental developments also offer exit-strategy flexibility, because units can be sold individually or in sub-portfolios.
SFR Communities Offer a Unique Incentive
SFR developments offer other advantages as well. Development of SFRs clustered together can allow for more efficient management and maintenance than SFRs scattered in different locations. SFR communities can provide an incentive for renters to develop strong ties to the communities they move into, especially for families with school-age children. Renters tend to want a strong foundation for their growing families, and SFR communities generally provide the neighborhood feel, privacy, space, and interpersonal connections they seek.
In summary, SFR can be a valuable addition to your investment portfolio. It is a unique asset class that aligns with the changing needs of the housing market.
For more information on Virtua Partners’ single-family rental investment opportunities, please visit: https://virtuapartners.com/
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