Singled Out: How Single-Family Rental Investors Choose Where to Buy Housing
They weigh the competition and business climate — and, increasingly, they just build it themselves
The single-family rental (SFR) market is having a moment.
While other asset classes like retail and office have stumbled during the coronavirus pandemic, the SFR market has thrived, thanks to ultra-low interest rates and occupancy in rentals remaining steady compared to pre-COVID-19.
“It’s a gold rush,” said Don Ganguly, senior vice president of online SFR platform Mynd Investor Services. “Inventory has been tight and demand has been super tight.”
A recent study by Mynd found that Milwaukee, Memphis and Detroit are expected to attract a lot of activity for SFR investors in 2021 as home appreciation in those cities jumped between 2019 to 2020. Other cities like Houston and Charlotte, N.C., have remained attractive, Ganguly said.
This marks the first time that the SFR market — which cropped up in the wake of the housing crisis roughly 12 years ago — faced a downturn and its performance disproved those who questioned its long-term viability.
“It just proved to be a very resilient asset class,” said Gary Beasley, CEO of online SFR investment platform Roofstock. “Up until recently, we weren’t as convinced that the asset class was going to perform as well as it did during a downturn; now, that’s sort of been proven out.”
But while the majority of SFR investors are so-called retail players — private buyers who tend to buy an average of 1.7 properties each — the space still has firms like American Homes 4 Rent, Invitation Homes and Tricon Residential that own billions of dollars worth of assets.
Retail buyers might be flooding to cities with high yield rates and low home prices, these institutional investors swarm spots with steady job growth, good schools and expensive housing stock like Atlanta, Dallas and Phoenix.
“Institutional investors are generally flocking toward growth areas and areas in specific submarkets that tend to be a little bit more on the expensive side,” Beasley said. “They have institutional criteria and they tend to gravitate toward a little bit nicer homes.”
A spokeswoman for American Homes 4 Rent did not respond to a request for comment. A spokeswoman for Invitation Homes declined to comment, citing the fact the real estate investment trust has not entered any new markets in recent years.
The larger investors tend to target homes that range from $250,000 to $350,000 a pop, compared to the $75,000 to $200,000 favored by retail buyers, Beasley said. And they only enter a city if they’re sure they’ll be able to scoop up a plethora of homes.
“They buy in bulk,” Ganguly said. “It’s very difficult for them to go and duel it out with retail investors … they want a critical mass.”
Depending on the investors, some will only enter a city if they can pick up at least 1,000 to 2,000 homes there, and they make sure to bail before they buy too much (the amount also changes for each investor).
“There’s kind of a mini-viable scale, and then there might be a point where they feel fully allocated,” Beasley said. “That really depends on the size of the company.”
And some of these buyers have become increasingly less-concerned with yield rates at all and have started to target cities like Austin that they expect to boom as they siphon off tech companies and workers from more expensive regions, such as the San Francisco Bay Area.
“A lot of people are saying Austin could be the next Silicon Valley,” Ganguly said. “They don’t care even if they’re cash neutral; they know Austin is going to go up.”
Typically, the larger investors targeted homes where they could expect the rent to be 1 percent of its total price — a $100,000 property would rent at $1,000 a month — but they’ve increasingly been OK with homes that only get 0.8 percent of the rent as home values have shot up, Ganguly added.
Wall Street dove headfirst into the SFR market in the wake of the 2008 financial crisis, as banks backed institutional buyers who cropped up to scoop up thousands of homes emptied by foreclosure, betting on an increasing number of permanent renters.
These companies expanded rapidly between 2011 and 2017, growing to own nearly $60 billion in properties around the country and about 200,000 homes, nearly 1.5 percent of the SFR market. And they have commanded high valuations and lots of investment from private-equity firms.
Invitation Homes, the largest publicly traded SFR REIT, carried a $12 billion valuation when it went public in 2017. Things have only increased during the pandemic with Blackstone (BX) Group, Koch Industries, Morgan Asset Management and Brookfield (BN) Asset Management all making nine-figure investments into SFR companies in recent months, The Wall Street Journal reported. And SVN | SFRhub Advisors said it had a 650 percent increase in investment activity on its brokerage platform from mid-March to April 2020, just as the pandemic started to swamp the U.S.
“For the first time in U.S. history, rental household growth outpaced U.S. homeownership,” Jeff Cline, executive director and principal of SVN | SFRhub, said in a statement in April. “Looking ahead, consumer economic, lifestyle, and work-at-home popularity indicate global investors’ near- and long-term outlook for capital growth and income opportunities in single-family detached homes, for rent is better than it’s been for several years.”
A report from multifamily lender Arbor found that cap rates for the assets ticked down in 2020, while occupancy rates for them in the third quarter of 2020 averaged 95.3 percent, the highest since 1994.
Coupled with the historically low interest rates, it means that the big players have more competition than ever to buy up homes. Aside from a growing number of retail investors vying for properties and actual homeowners looking to get more space during lockdowns, a new crop of institutional investors have started to hone in on the market.
“Investors are starting to look at SFR as part of their rental housing allocation,” Beasley said. “They’re actually taking some money that might have been earmarked for apartments and putting it towards SFR.”
Platforms like Roofstock and Mynd make it easier for these investors to get a foothold, since they don’t need to set up their own shop in a city to manage properties, but instead, rely on SFR property managers.
“There’s a fair amount of dollars chasing assets right now,” Ganguly said.
But the larger players aren’t sitting idle. Instead of duking it out with retail and new institutional investors for properties, they’ve cut out the middleman to just build properties in suburban communities themselves.
“The builders are getting inundated with calls from large investors,” Ganguly said. “The demand for renting is pretty high in the suburban areas, but there isn’t easy inventory for you to go out and buy in bulk.”
Instead, the model — dubbed build-to-rent (BTR) — has the institutional investors buy land entitlements from home builders to let them, instead, construct homes to become straight rentals. Ganguly said these investors have been targeting spots in Southeast Texas, Florida, Phoenix and “wherever they can get good stuff” for this.
American Homes 4 Rent became one the country’s most active builders during the summer, after it doubled the size of its home-building agreement with J.P. Morgan to $625 million and raised more than $400 million in a stock offering, according to WSJ.
“We’re endeavoring to deploy that capital as quickly as possible,” Christopher Lau, American Homes 4 Rent’s CFO, told investors recently, according to WSJ.
All of this can have some downsides. While the SFR market is red-hot for investors and can offer a small barrier for entry for some newer players to dive in, it does help to drive home prices up and keep homeownership out of many middle-class families’ reach.
“During one of the greatest recoveries of land value in the history of the country, from 2010 and 2011 at the bottom of the crisis to now, we’ve seen huge gains in property values, especially in suburbs, and instead of that accruing to many moderate-income and middle-income homeowners, many of whom were pushed out of the homeownership market during the crisis, that land value has accrued to these big companies and their shareholders,” Daniel Immergluck, a professor in the Urban Studies Institute at Georgia State University, told The New York Times — just before the pandemic.