Institutional Investors are Entering the Rental Market
Savvy investors are continually seeking both new avenues to improve their rate of return on investments and to diversify their portfolios against risk. Now, with the residential real estate market soaring, these money managers, hedge funds and individuals are pouring money into private homes as investment properties. In the past, the focus of these investors in residential real estate was multi-family buildings. But now, they see opportunity in the private home space.
The trend stems from the Great Recession of 2007/2008, when home prices across the country collapsed. Institutional investors began to enter what they felt was an undervalued market. Recently, this trend has accelerated. Between 2006 and 2018, the number of single-family rentals grew an impressive 30.1% to 14.7 million.
During the pandemic year of 2020, single family homes prices slipped precipitously across the country. But soon home values began to skyrocket. People who feared searching for a home due to Covid, began to return to the market in droves after the vaccines were introduced. People who needed to move (to upsize or downsize) all entered the market at about the same time. Also, the work-from-home trend has served to lure more people to private homes which usually affords more space for a fully functioning individual office. Health concerns about congested living in multi-family buildings also contributed to the trend.
The Single Family Rental Market Index (SFRMI) published by the real estate consulting firm, John Burns, is a quarterly report which tracks the industry’s health, measuring factors such as median rent and leasing activity. Occupancy rates rose to 90.3% out of a top score of 100 in the first quarter of 2021. The rise is remarkable when we consider that the SFRMI a year ago was only 62.5%.
And, yes, those savvy investors have been rewarded handsomely. According to CoreLogic, single-family rental rates rose 5.3% in April 2021 compared to a year earlier. And since there are interruptions in the supply chains which most analysts agree will not abate anytime soon, it seems that rental rates will continue to rise, as demand oustrips suppy.
Some investors are not merely buying private homes to rent out, they are actually building entire rental communities of single-family rentals. The investment strategy has a name: Build to Rent. Although Build to Rent is not new, it is rapidly increasing. In 2020 alone, 226,000 new single-familt rentals were brought to the market. And from March 2020 to June 2021, institutional investors poured about $15 billion into Build to Rent Companies. Over the years a debate raged among real estate professionals as to whether the single-family rental boom would last. It is now clear that the trend is gaining steam and there is now general agreement that this investment trend is here to stay.
This asset class provides a monthly income where the investor is not saddled with custodial duties or renovations. The company takes care of these things.
The commercial real estate finance company, Walker & Dunlop, estimates the market for these rentals is estimated to be $3.4 trillion. Further, the firm forecasts that the single-family rental market will outpace those of apartment, office, retail, and hospitality properties during the next few years due to population growth, particularly as the millennial generation start families.
Simply stated, beyond steady rental income, these rental investments stand an excellent chance of increasing in value over time. Finally, and importantly, this asset class offers diversification for those folks invested in the stock or bond market.