How you can use the single-family rental market to win in 2021

by David Kitai30 Dec 2020

The single-family rental (SFR) market has changed fundamentally in recent years. Once a largely ‘mom and pop’ sector it has seen the wholesale arrival of institutional investors and property management companies. Demand, too, is shooting up as young families move out to the suburbs, people flee pandemic-stricken dense cities, and retirees see new flexibility in renting rather than owning. The SFR market has been one of the best performing subsectors of commercial real estate, mirroring the strong performance of single family purchase this year.

Now, with a vaccine on the way and a return to normalcy on the horizon, what does the future hold for SFR? Michael Carey (pictured), senior director at Altus Group, believes 2021 will be an extremely strong year for SFR. He explained that investors will continue to buy these properties as they look for yield after so many other commercial real estate subsectors, such as retail, offices, or hotels, were badly damaged by the pandemic. He expects that renters, too, will continue to choose to live in these properties even in a post-pandemic America when a subway doesn’t hold the fear it currently does.

“SFRs right now have higher returns than multifamily,” Carey said. “Single family is a perfect avenue for [institutional and mom and pop] investors to invest in residential.”

Read more: Which CRE sectors will struggle and which will thrive in 2021?

Those returns, Carey explained, are driven by a consistent and growing demand for these properties among renters. SFR rental demand has mirrored the millennial-led suburban shift, likely accelerated this year by a pandemic-driven flight from cities. Other demographics, too, are using these properties. Carey cited the example of retirees who use year-long rentals to live in different parts of the country, closer to now-disparate family members. Some potential homeowners see better appreciation for their capital in equities like tech stocks and may not want to tie up so much of their net worth in a home, choosing to rent instead. Others expect they may never work in their office, at least full-time, again and are willing to commute two or three days a week to enjoy a house with a yard.

While Carey expects demand for multifamily units in cities like New York and San Francisco to increase once the pandemic has passed, he doesn’t think the demand for SFRs in lower-density settings will decrease significantly as a result. While the pandemic has made these properties more appealing to renters, he’s confident that their appeal extends well beyond our current moment.

Competition for properties on the purchase side, as well, ought to drive some potential buyers into the SFR market. Those younger homeowners might have dreams of a house of their own, but bidding wars and short stock might make the process too difficult or onerous for them. Renting a house in the suburbs could prove more appealing.

This market presents an opportunity for mortgage professionals to secure deals for small- and large-scale investor clients. They can generate serious volume working with these clients provided they know how to do it.

Read more: Could this be the hottest housing market on record?

Carey explained that working with investor clients takes a somewhat different skillset than that of a purchase borrower. Mortgage pros need to work with appraisers trained and experienced in rental properties. They need to look at indicators like the gross revenue multiplier, operating expense ratios, NOI ratios and target returns. They need to counsel their clients on how this property fits within their wider financial lives.

“We touch over 5,000 appraisals every quarter for our clients, we have a single family rental intelligence platform that holds over 1,000 data points for each single family rental property that we appraise,” Carey explained. “It’s about data and how you analyze data.”