Historically, most single-family rentals in the United States were either owner-occupied or managed by a small landlord. Today, a growing number of single-family homes are owned by institutional investors. Real estate companies buy up blocks of single-family homes before renovating and renting them. Over the last fifteen years, the single-family rental homes’ asset class has exploded. This asset class has outperformed other residential and commercial real estate sectors.
Its rise is partly due to changing attitudes and finances amongst Gen X, Millennial, and Gen Z Americans. Since the pandemic began, this shift has only intensified. Home prices have reached record highs, and inventory has reached record lows, while wages have failed to keep up with inflation. As a result, many would-be buyers have been priced out of the housing market. These individuals seek the lifestyle provided by a detached suburban home and desire the privacy, space, safety, and sense of community suburbs offer.
In this post, we look at the history of institutional investment in the single-family rental space. We examine a number of high-performing single-family rental REITs, mutual funds, and public companies. We also consider the future of this space and address concerns posed by renters and investors alike. Learn everything you need to know about single-family rentals below.
A Brief History of Institutional Investment in the Single Family Rental Space
According to market data from Freddie Mac, single-family rentals have been a “significant portion of the national overall rental market” for decades. SFRPs “consistently made up 10-12 million units in the twenty years preceding the Great Recession.” We usually think of apartment buildings when considering the US rental market. Despite this, SFRs made up “30-35 percent of the renter market share” before 2008.
Single-family rentals have always played a large part in our rental market. However, the types of investors in this space have changed in recent years. Institutional investors snapped up foreclosed homes when the financial crisis hit and the housing market crashed in 2008. They renovated these distressed properties and turned them into single-family rentals – often leased by owners who lost their homes during the crisis.
Institutional ownership is still growing, taking up more and more space in the industry over the last decade.
Federal Government Helped Institutional Investors Buy Up Foreclosed Single-Family Homes During the Financial Crisis
The federal government aided institutional investors in their plan to buy up and rent out single-family homes en masse. In her 2019 article “When Wall Street is Your Landlord” for The Atlantic, Alana Semules explains. Semules writes that the government lent support “at the height of the foreclosure crisis…as hundreds of thousands of families lost their homes.” During this time, “empty houses blighted neighborhoods” and threatened economic collapse in those communities.
To boost the housing industry and encourage swift economic recovery, federal officials “incentivized Wall Street to step in.” They established “a pilot program that allowed private investors to purchase foreclosed homes easily…from the government agency Fannie Mae” in large numbers. As Semules notes, the government’s tactic worked. Institutional investment in single-family rentals exploded. In the seven years that followed, “some of the world’s largest private-equity groups and hedge funds…spent a combined $36 billion.” They bought “more than 200,000 homes in ailing markets across the country.”
Growing Rental Market Boosts Demand for Single-Family Rentals
Since the Great Recession, the number of renters vs. homeowners in the US has skyrocketed. Due to stagnant wages, revamped mortgage requirements, and high home prices, the homeownership rate has steadily declined since 2005. Conversely, the share of renters has grown substantially. According to Semules, the US “added less than 1 million households in owner-occupied homes, but 6.5 million in renter-occupied homes” between 2007 and 2017. During the COVID-19 pandemic, new construction of single-family homes skidded to a stop.
This further constricted supply in the housing market — pushing up costs and pricing out many would-be buyers. Between 2020 and 2021, the median home price in America increased a whopping 16% YOY. Due to low inventory and rising costs, homeowners have turned to renting instead.
During this time, single-family rentals in suburban areas surged in popularity over city apartment buildings. According to the Pew Research Center, “the share of US adults who express a preference for living in an urban area has dropped.” It fell “from 23% in 2018 to 19% in 2021.” Conversely, “the share who would prefer living in the suburbs…is up from 42% to 46%.” Americans cite large yards, safer communities, more privacy, access to recreation, and room to grow when explaining this shift. Single-family rentals in suburban areas of the US offer Americans each of these benefits — even when they cannot afford to buy a house.
Introducing Real Estate Investment Trusts (REITs) in the Single-Family Rental Space
Toward the tail end of the financial crisis, several SFR REITs emerged. In “Meet the AI Landlord That’s Building a Single-Family-Home Empire” for Fortune, Shawn Tully describes this as an interesting change in the REIT universe. According to Tully, “when bigger fish…invested in rental housing, they focused on apartment buildings.” They favored these “larger assets” because the density of rental units in a single building “made them more cost-effective to manage.”
This changed when investors realized that single-family properties “could be a more stable income source than apartments.” Renters of single-family homes tend to stick around longer than those in apartment buildings because these renters are often families seeking stability and excellent school districts. They are rarely single people or couples who can move from place to place more easily.
Single-family REIT portfolios have performed well between existing homes and new construction since they were added to the market. In his February 2022 article “Why Are REITs Going All-In on Single-Family Rentals?” for The Motley Fool, Matthew Frankel, CFP, explains. Frankel points to Invitation Homes – the nation’s “biggest single-family real estate investment trust” – and American Homes 4 Rent. According to Frankel, Invitation Homes’ is enjoying a “historically large releasing spread” as they expand their collection of homes and increase rental rates.
American Homes 4 Rent is doing equally well by focusing on build-for-rent instead of renovating existing homes. There are REITs in the manufactured housing space now too. UMH Properties is one of the most popular and best performing manufactured SFR REITs. UMH is also benefitting from rent growth.
Accelerated Investment During the COVID-19 Pandemic
More Americans are renting because of pandemic-era changes in the housing market. Unprecedented demand due to low interest rates, construction freezes, low inventory, inflation, and supply chain issues have contributed to sky-high housing costs. Investors have been quick to respond to skyrocketing tenant demand.
Flush with cash and access to unbeatable financing options, real estate companies have bought up existing homes, increasing their market share. Alex Veiga explains in the article “Companies Step up Buying Houses, Bet on Hot Housing Market” for US News. Veiga writes that “residential real estate bought by companies or institutions hit an all-time high” in 2021’s second quarter. They bought a total of 67,943 properties during this time. Referencing market data from Redfin, Veiga notes that “companies accounted for 16.1% of all [single family home] purchases in the second quarter.” Real estate companies purchased only 8.4% of single-family homes for sale just a decade ago.
REIT Performance During the Pandemic
SFR REITs have performed exceedingly well during the pandemic. In her August 2021 article, “Wall Street is buying up family homes. The rent checks are too juicy to ignore” for CNN Business, Hanna Ziady explains. Referencing Green Street data, Ziady writes that “single-family rental values in the United States are 15% above their pre-COVID level.” This has boosted the cash flow for investors, and these rentals are performing better than other property types.
According to Ziady, “renting out single-family homes is expected to deliver annual returns for private investors in the next three years of 6.8%.” Apartments will return only 6.1%. Two REITs mentioned by Frankel – Invitation Homes and American Homes 4 Rent – have already outperformed apartment REITs like AvalonBay and Equity Residential. We take a more thorough look at the financial performance and market value of SFRs below.
Financial Performance of Built-to-Rent and Renovate-to-Rent Investments
According to the Freddie Mac paper “Spotlight on Underserved Markets,” SFR “is the single largest rental market segment by valuation and households.” Low vacancy rates nationwide, rising rent prices across all tiers, and fast-paced rent growth in certain hotspots have boosted SFRP returns. These elements have proved the business model of companies that manage them. According to Danielle Nguyen in a recent post for John Burns Real Estate Consulting, SFR REITs reported 98% continued occupancy. They also reported an 18% growth in lease renewal in the third quarter of 2021.
Economist Molly Boesel elaborates in her March 2022 article “Single-Family Annual Rent Growth Off to a Fast Start in 2022” from CoreLogic. Boesel writes that “US single-family home rent growth hit its 10th consecutive record” in January 2022. While rent prices increased all over the US, Sun Belt markets “once again [registered] the largest gains.” In the Sun Belt and Rust Belt, SFR companies have purchased their most significant share of single-family homes. SFR markets in Phoenix, Las Vegas, Charlotte, Atlanta, Miami, and Orlando have all experienced double-digit YOY growth.
As Brandon Barker notes in a post for Roofstock, single-family rents have reliably “increased by about 3% annually” over the last twelve years. Last year, however, rental rates experienced the “fastest year-over-year increase in the past 16 years.” Compared to apartment rents and commercial property rents, “single-family rents produced more reliable returns of 17.5% in their best year.” Single-family rental returns decreased “by only 2.5% in their worst year.” With vacancies expected to dwindle even further in the coming months, investors anticipate favorable returns next quarter.
Future of Institutional Investment in SFR
While SFRI is expected to grow in the coming years, legislative changes could alter the landscape. However, an uptick in build-to-rent and SFRI technology could boost investment and profits. Below, we consider the future of institutional investing in single-family rental portfolios.
A major trend in the SFRI space is build-to-rent, which involves developing brand-new subdivisions of single-family rentals. In a recent article for Business Insider, Dominick Reuter notes that “demand for rental homes is now spurring developers to build entire communities.” Major players in the space include PulteGroup, Transcendent Investment Management, and KKR & Co. Invitation Homes will purchase more seven thousand built-to-rent homes from PulteGroup in the next five years. Advocates praise these companies for adding much-needed housing inventory. Critics express concern over poor maintenance practices and ever-rising rental rates.
Even so, build-to-rent does not appear poised to slow down anytime soon. Today, build-to-rent single-family homes “make up about 6% of all new homes.” However, this number “could soon double to 12% as demand grows for more flexible housing.” In his article “Building and Renting Single-Family Homes Is Top-Performing Investment” for The Washington Post, Will Parker explains. He writes that returns on built-to-rent homes are staggering. Referencing Green Street data, Parker notes that the “expected risk-adjusted annual return for build-to-rent investments in the private market is now about 8% on average.” The build-to-rent sector has the highest annual return “of 18 property sectors tracked by the firm.”
As mentioned above, the federal government intervened during the financial crisis. They helped institutional investors buy up single-family homes en masse, with some buying thousands that had foreclosed. In 2018, Fannie Mae and Fannie Mac ended the pilot programs they started to help investors rehab and rent out homes. While in effect, there was much criticism of these programs by renters, nonprofit organizations, prospective homeowners, and groups like the National Association of Realtors.
Francis Monfort explains the controversy in his article “Fannie Mae, Freddie Mac to end single-family rental pilot programs” for Mortgage Professional America (MPA). Quoting Elizabeth Mendenhall, Monfort writes that “‘Fannie Mae and Freddie Mac compounded on inventory shortages.'” Mendenhall believes that these pilot programs worsened the nation’s affordable housing crisis by favoring institutional investors.
Pilot programs like those operated by Fannie Mae and Freddie Mac have since ended. However, the current White House is weighing new changes to the single-family rental sector. Alex Veiga explains in the article “Companies Step up Buying Houses, Bet on Hot Housing Market” for US News. Veiga writes that in September 2021, the White House ordered “federal housing finance agencies” to prioritize regular buyers. They were to “give buyers and nonprofits a 30-day exclusive window to make offers…on homes that failed to sell in foreclosure auctions.” The administration is considering additional measures to encourage participation in the market from average Americans – not just institutional investors.