Good news for rental investors but bad news for all of the people needing inexpensive housing. It’s well established that purchasing a starter home remains out of reach for many people. The news isn’t much better for tenants in the single-family rental market that has been experiencing dramatically low vacancy rates for a decade that have naturally led to equally dramatic increases in rent prices.
Historically, a driving force at the entry-level of the housing market has been the cost difference between owning and renting a home. When it is cheaper to buy than to rent (or about the same) people find a way to pull together a down payment and many become homeowners for life. But that historic model has changed. Exorbitant down payment requirements, rising student and consumer debt, and the difficulties of meeting mortgage qualifications have created a generation of renters rather than buyers.
If you’re like me, you’re tired of hearing about the Great Recession that began more than a decade ago and saw the slow turn around begin eight years ago. But the lingering proof that it was a “Great” Recession is the fact we are still dealing with the aftermath today. Underwater mortgages, foreclosures, and short sales ruled the real estate headlines during the recession. That is when and why investors began digging for single-family rental gold.
Institutional buyers (Wall Street) took advantage of distressed sales to start buying up these houses to turn into rentals. Large companies like Invitation Homes, American Homes 4 Rent, Progress Residential, Main Street Renewal, and Tricon American Homes now own approximately 200,000 single-family rental homes and that number is growing. But they didn’t buy as much nor are they growing as fast as you may think.
Here is the surprise; institutional owner-operators only make up a very small share of the total single-family rental market. According to the Amherst Capital Management report, “U.S. Single-Family Rental—An Emerging Institutional Asset Class,” institutional ownership is limited to between 1% and 2%.
What actually happened is well-positioned small investors have been buying the lion’s share of single-family houses. The smallest investors (buying 1 or 2 properties per year) acquired 38% percent of rental houses. And another 60% were bought by investors purchasing 10 or fewer houses each year.
The humongous shift to more renters is where it becomes even more interesting. U.S. Census data shows a population increase of 23.7 million people roughly during and following the Great Recession. Of all those people, only about 700,000 became homeowners. The remaining 23 million became renters. That is the gold of single-family rentals.
This is a no-brainer when it comes to supply and demand. As households find it harder to buy a home, the rental demand is soaring. While there has been a tremendous increase in big city apartment building construction for several years, migration has started occurring. The millennials (ages 23 to 38) are heading for the suburbs and for single-family homes that they can’t afford to buy. We’ve become accustomed to thinking of baby boomers as the largest population in the market when it peaked at about 77 million people. But today’s dominating Millennial generation is a force of 87 million.
Whether they're renting or owning, the maturing millennial generation will enter the single-family housing markets in full-force throughout the 2020s. This brings us back to the Great Recession when Millennials deferred starting their own households because of unemployment, student debt, etc. This generation is only now beginning to grow in their careers but they still don’t have the financial resources to become homeowners. Instead, Millennials are choosing to rent large suburban houses (2,000 square feet and larger) as they mature and start families.
Almost all of the data points to larger houses playing a significant role as rentals for the coming decade. Along with the economic condition of the Millennials, new entry-level construction shows no sign of improving in any meaningful way. Construction is happening at midsize and above with the higher end showing signs of weakening. This matches up with where the single-family rental market is heading.
Rising rents, low vacancies, and increasing house sizes are not the only trends with single-family rentals. The attraction for investors has always been the combination of steady cash flow plus the appreciation in the value of the house when it came time to sell. A big drawback was liquidity because tenant-occupied houses were difficult to sell. But the market has evolved to even remove this drawback. Today’s strong rental market no longer requires a house sit vacant until an entry-level buyer becomes an owner-occupier. Today’s market is ripe with investors and landlords lining up to buy homes with tenants in place. Turnkey real estate is also growing, and fast.
The combination of historically low housing supply and strong Millennial demand for family-sized houses creates a strong macroeconomic case for single-family rental investing going into the decade of the 2020s.
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