As the US economy shows signs of stabilizing and returning to something close to the pre-pandemic normal, rental markets across the country are once again thriving. Currently, the United States’ rental market is characterized by low supply, increased demand, rising rental prices, and good returns for investors. Within the rental industry, single-family homes are seeing the largest amount of growth and surging demand from both renters and investors.
Reasons Why Single-Family Rental Demand is Surging
Real estate prices around the country are rising as inventory is low due to high demand and slow-downs in the construction industry over the last two years. The result is that more buyers, including middle-class buyers, are either being priced out of the market or opting out, deciding that homeownership is simply too expensive at the moment.
First-time homebuyers have been particularly impacted by rising real estate prices. These buyers usually make up 40% of sales, but according to the National Association of Realtors, first-time homebuyers only accounted for 29% of sales in 2020.
“Converging economic trends are driving a surge in single-family rent prices, and consumer confidence has driven an uptick in demand for both renters and buyers,” said economist Molly Boesel. “The ongoing preference toward more living space — and slim for-sale inventory — is forcing would-be buyers back into renting, putting significant strain on the single-family rental market.”
In addition to those that are priced out of the market, there is a rise in the number of individuals that are choosing to rent, happy to avoid the maintenance and repair headaches of ownership, the ongoing expenses of homeownership, and the commitment that comes with buying a house. In contrast, renting leads to increased flexibility, no emergency repairs with surprise expenses and no need for a large down payment.
Both groups — individuals recently priced out of the market and renters-by-choice — are turning to single-family rentals in an effort to get the best of both worlds.
For investors, single-family homes also offer some clear benefits. According to Invitation Homes CEO Dallas Tanner, this type of rental has a 75% to 80% renewal rate and the average tenancy is three years, twice as long as apartment residents. The result is lower expenses, long-term quality Tenants, and a better return for Landlords.
Not surprisingly, a recent New York Times report found that “demand for single-family rental homes is showing no sign of easing up, and that is pushing rents through the roof, especially for the highest-priced properties.”
How the Industry Is Changing
The single-family rental industry is largely made up of mom-and-pop investors. According to an Amherst Residential Report, small landlords, with less than 10 homes in their portfolio, currently makeup around 85% of the sector. However, there are two notable shifts happening in this sector: a surge in institutional investors and a rise in built-to-own homes.
In the last year and a half, single-family homes have been more lucrative than commercial real estate. Investment companies are looking to take advantage of low supply, rising rents, and rising renewal rates by purchasing more single-family rental homes.
Publicly traded Invitation Homes is the largest U.S. Landlord of single-family homes with over $80,000 rental houses. The company also reportedly has $1 billion set aside for the purchase of more homes. While they’re the largest and most experienced company of this type, they’re seeing increased competition from other investment firms, working to find as many single-family homes as possible, especially in the sunbelt where there is above-average demand.
Based on this shift, it’s not surprising that a recent New York Times report found that built-to-rent homes have become “the fastest-growing sector of the housing market.” Built-to-rent homes are exactly what they sound like — single-family houses built for the purpose of renting.
This sector was growing before the COVID-19 crisis, but the rate of growth has accelerated rapidly in the post-COVID market, as the number of built-to-rent homes has increased by 30% from 2019 to 2020. Currently, 6% of all new houses in the United States are built to be rentals, and this number is expected to double over the next decade.
Developers are building entire neighborhoods of homes built to be rentals. Many of these include three and four-bedroom homes with high-end finishes and features.
What This Means for Landlords
For small and large landlords, the message from this data is clear. The recommendation right now is to hold or buy single-family homes. While institutional investors threaten to change some aspects of the industry and carrying costs, like property taxes, insurance, and construction costs, are rising, it’s still an attractive investment. Rising demand, low inventory, and changes in consumer behavior all indicate that the single-family rental market will continue to grow in the coming months and years.