In the present era, single-family rentals are experiencing high renter demand. Especially after the devastating circumstances of COVID-19, the popularity of single-family homes has increased. This is because they offer all the amenities of single-family homes without the exorbitant prices of homeownership. As a result, investors and developers are making significant single-family rental investments to generate increased returns.
Therefore, reports suggest that at least $21 billion have been invested in the single-family rental market and build-to-rent properties between March 2020 and June 2021.
In this blog, we will get into the details of the growing popularity of single-family rental investments in 2021.
What is a Single-family rental property?
Single-family rental properties are unique real estate assets. These are located in suburban neighborhoods and are usually detached structures, typically with a yard and a garage. Such properties are generally owned by homeowners and investors who rented them out.
Single-family rental properties, although located in suburbs, offer amenities that are on par with urban multifamily properties. Therefore, single-family rental communities enjoy several amenities, such as:
- More greenery
- Larger interior spaces
- More privacy
- Quieter neighborhoods
- Pet-friendly spaces
- Quality public buildings such as hospitals and schools
- Yard spaces
- Professional property management
Single-family rentals are a smart investment
Let’s assume, you want to invest $250,000 but only have $50,000 capital. Hence, SFR is the best option for you. This is because it’s a common investment practice where the investor uses borrowed money to eventually increase returns.
Through financing – whether a mortgage, VA loan, or private investor, your $50,000 down payment will allow you to borrow the remaining $200,000 to purchase the asset.
Simultaneously rent growth boosts the initial investment amount of $50,000 to five times. Therefore, an investor can go on to invest in five $250,000 single-family rentals rather than buying one for $250,000.
By using that capital sum to finance five $250,000 single-family rental homes (putting $50,000 down for each and borrowing the rest), you accelerate your investment share to $1,250,000 (5 x $250,000).
Moreover, by using that capital amount to finance five $250,000 homes (putting $50,000 down for each of the five homes and borrowing the remaining amount) you can increase your investing share to $1,250,000 (5 x $250,000) in the long term.
Considering, you have expenses and mortgage payments each month, you’ll still be earning five times the annual appreciation than investing in a single SFR with $250,000.
Therefore, it is safe to say that institutional investors in real estate markets can expand their single-family rental portfolios only with borrowed capital. Hence, SFR is both a powerful income-generating asset class and a secured investment fund.
During COVID-19 in 2020, a large percentage of the urban population migrated to the suburbs due to remote working and for accessing greater privacy.
Hence, last year, Americans increased home buying. As a result, the surging demand skyrocketed home prices to record highs. Therefore, the median single-family rental home sold in the US increased to a record $374,900 in Q2 2021, a 16.2% increase from $322,600 in Q2 2020.
A less volatile investment
Like other real estate asset classes, single-family rental properties have a low correlation with the stock market. Hence, such investments have historically proven to be more predictable and stable than stocks and bonds.
Moreover, unlike stocks, single-family rental investments are tangible. Therefore, investors can watch their properties generate steady monthly rents. Furthermore, these properties can appreciate and generate maximum returns year over year.
In addition to this, just like other real estate assets, single-family rentals are also inflation-proof. So, these investments provide a natural hedge against inflation.
Read Lilypads’ blog on how real estate is a natural hedge against inflation here.
Outstanding source of income
Institutional investors and high-net-worth individuals should invest in the single-family rental markets. Although REITs and crowdfunding offer steady cash flow, they do involve additional risks from the stock and capital markets.
However, investors can employ professional, third-party managers for handling the day-to-day operations of these properties. Moreover, these managers can take care of value-adding aspects including include repair, rent collection, and tenant communication.
So with quality amenities and property management, these single-family rentals can produce durable cash flows. Furthermore, they also exhibit excellent growth prospects.
Read Lilypads’ blog on how to calculate rental property cash flow here.
Single-family rentals are more affordable than traditional homeownership
Post-pandemic, purchasing a home proves to be a monumental expense for most US families. And the recent price surge has made homeownership even more unaffordable.
Therefore, there is a rise in the occupancy rates of single-family rentals. People can now access quality homes, and also manage the down payment, mortgage, and closing costs.
The Lilypads Bottomline
With the growing demand for single-family rentals among the majority of millennials and young boomer Americans, investors and lenders have begun to realize the potential of real estate investing in this asset class. With better growth prospects and strong fundamentals, the single-family rental market is attracting unprecedented investments since the last year.
The demand for the housing market is rising day by day. The growing population will continue to put pressure on housing needs, especially as the millennials expand their families and seek more flexibility and amenities at much lower costs. Therefore, it is safe to say that single-family rental investments are here to stay.