There’s a sector of the real estate market that few people realize exists…yet.
In fact, I’ve been writing about real estate for longer than I care to admit and I’ve never heard of this sector of the real estate market until just recently.
Of course, I suppose I could be forgiven this, as it is a fairly new segment of the real estate market.
According to Freddie Mac, the large institutional investor for residential real estate “didn’t enter the market until 2012 and have only accounted for 1-2 percent of the total share of purchases through 2014.”
Institutional single-family home rentals
While constituting only a small portion of the rental market, the growth of the institutionally owned single-family home rental sector is undeniable.
To learn more about this market, I spoke with David Howard, Executive Director of National Rental Home Council (NRHC), a non-profit association that represents the interests of institutions within the single-family rental home industry.
We discussed how the industry formed, the demographic NRHC’s member companies serve, and how this sector may grow over the coming years.
What does the NRHC do?
“So, we’re the national trade association representing the single-family rental home industry. And so our member companies are single-family rental home companies that own large portfolios of homes that are for rent.
“Some of our larger companies might own 60, 70 or 80,000 homes. Some of our smaller members might own 500 homes or 1,000 homes, in markets across the country.
“We have been around as an organization probably for eight or nine years. It’s a relatively young organization…a relatively young industry for that matter.”
I’m not familiar with industrial owned and managed rental homes. It’s an interesting concept. Tell me more.
“When it comes to rental homes, people are familiar with multifamily rentals, apartment buildings, things like that.
“But people are less familiar with large scale professional rentals when it comes to single-family, right? That’s really what our business is – and it’s a business that really makes sense at a certain scale.
“So if you’re a company, it probably doesn’t make sense to have three or four homes in 20 different markets across the United States because the problem is really about managing those homes, right?
“So if you think about it, if you’re in the apartment rental business, you might have 30, 40,50 or even 100 units under one roof. And so the management of those units is pretty efficient, right? You hire somebody to be a property management professional who probably lives in the building and manages all of the units.
“However, imagine having 50 homes across a metropolitan area…that’s more of a challenge. And so it really only makes sense from a property management standpoint to do this business at a certain scale.
“And that scale is typically 500 homes and up in a particular market. Because what you could do is, you can hire property management professionals in the market where you have your homes and so all of a sudden, property management becomes much more efficient to you.
“For example, if you’re a tenant in a rental home the property owner lives three towns over, you know, it’s sometimes difficult to get your landlord to come to the house to make repairs, appliances, things like that.
“So what these companies do is, they have property management professionals who work for the companies located in those markets where they own properties.
“And so all the companies have 24/7 customer service; if you have a problem, you just call an 800 line. A property management professional from that company will come out to your home and repair whatever needs to be repaired or replace whatever needs to be replaced.
“So that makes the property management aspect of owning and operating homes much more efficient.
How have you seen this market sector grow since its inception?
“The industry was really marked by pretty significant growth coming out of the Great Recession. The years from 2009 to 2012 were marked by some pretty impressive growth for the industry.
“And the reason for that, frankly, was, as I’m sure you recall, much more availability of homes. A lot of homes were vacant. A lot of homes had been foreclosed on and owners walked away from homes.
“And so that gave our companies an opportunity to come into markets where vacant homes were prevalent, buy the homes, renovate them, repair them, get them up to community standards, and then rent them out.
“So again, in those years you saw a lot of pretty impressive growth for the companies.
“I will tell you now, that growth has really tapered off so that the industry is not so much about growth anymore, as it is focusing on managing and operating the properties.
“It’s really about that…it’s really about the tenant experience, right?
“A lot of the homes now incorporate cutting edge technology and so you’re seeing a lot of smart home features in these homes.
“Companies will typically invest anywhere from $20,000 to $25,000 when they buy the homes. And a lot of that money goes towards bringing in technology that again, makes the tenant’s lives easier.
And it drives up the demand for those properties too, right?
“Yes, it does. And the goal here really is – on the part of the companies – to get tenants into the homes who appreciate the customer service that’s being offered, so they’ll stay in those homes.
“You know, sometimes people think that this industry is really about flipping homes and things like that. It really isn’t. It’s never the flipping of homes.
“We don’t focus on that at all or short term rentals, the Airbnb stuff. That’s not this industry. This industry is long term, single-family home rentals. It’s about focusing on the tenants, focusing on customer service and things like that.
What do you think are the market drivers that are pushing the growth of this market?
“We’ve seen a lot of growth in terms of the demand for single-family rental properties really, coming from a couple of different demographics.
“We’re seeing a lot of interest from young families. So folks who have rented in the city, and have been in an urban environment for two, three, four or five years and are starting a family and are looking for something that’s more suburban in nature.
“They’re looking at things like schools and shopping and a yard and things like that.
“And so they might not be at a place where they’re ready to buy, either because, frankly, in a lot of markets, there’s an affordability issue.
“People are still saving up for a home and they’re looking at rentals as a nice way to kind of bridge the gap between living in an apartment downtown and buying a home in the suburbs.
“They might be renting two or three years. And so they’re still saving, okay.
“We’re also seeing a number of folks in that category, who just want to kind of test drive neighborhoods, right?
“They live in the city for a number of years, they’re looking to get out to the suburbs, start a family, what have you, and they’re not totally certain where they want to be.
“And so they might live in a particular neighborhood for a couple of years, figure out whether or not they like it and then if they do, they decide to buy a home, so we’re seeing some of that as well.
“And then there’s the second kind of demographic group – that personally I think is really interesting – that are gravitating toward this same type of rental home product type are 55 plus individuals.
“Typically, it’s folks who are empty nesters so their kids have left home. And these folks want to be near their kids and their grandkids and an efficient way to do that is instead of moving to Denver or wherever the kids live and buying a home, it’s moving to Denver and renting a home that’s nearby because they might not know how long they’re going to be there.
“Quite frankly, they also might not want to dip into their retirement savings to buy a home, right? So being able to move into a home that, again, is well maintained, is professionally managed and nearby the kids and grandkids is a really nice option for a lot of folks.
“And this really kind of speaks to, frankly, what I think is really driving this industry. There are affordability issues, I get that but there’s also a certain appeal to the renting lifestyle.
“I mean, you’re seeing that really driven throughout the economy, whether it’s cars, clothes, music, you know people are more comfortable renting, whatever it might be than buying in this day and age.
“And I think that is starting to spill over to housing. And so what you’re seeing is in the single-family rental home industry, that’s really changing and evolving to cater to the needs of certain demographics that, frankly, are different than the needs of generations 20 years ago, in 30 years ago.
“We also see, by the way, a lot of folks who are renting because they might know they’re only going to be in a certain area for a couple of years. We’re seeing people whose companies, for example, ship them out to Phoenix for a couple of years. Knowing after that from there, they might be moved over to Dallas. And so yes, being able to rent in this format, makes life a little bit easier.
What do you see happening in this industry over the next five to 10 years?
“My guess is you’re going to see continued growth in the industry. And again, I think that’s because people are going to become more and more comfortable with the idea of renting homes for the short term.
“And when I say short term, I mean, you know, one year, two years, three years, that sort of thing. I think the industry is going to continue to evolve and get to a point where technology is going to offer the companies the opportunity to provide more and more services to connect with tenants.
“I think that’s going to be a really interesting thing to keep your eye on as it relates to this industry; you’re going to see solid growth over the coming years.
“I don’t think it’s going to be anything near what we saw coming out of the Great Recession just because I think that was a point in time that frankly has come and gone and the housing market in the United States is in a much different place now than it was then.
“Not to mention the fact that, as you know, this next generation kind of behind Gen. X is more and more comfortable with the rental economy. So I think that that’s going to account for a fair share of the growth as well.
“I think that while now when people think of renting they automatically think apartment buildings, right?
“I think over time…I don’t know, maybe five years, eight years…I think that we’re going to get to a point in the not too distant future where single-family rental homes are considered on par with apartment living or multifamily housing.
“That’s kind of the next big thing for this industry.”
National Rental Home Council