Wow, it is hard to read an article on investing or on real estate in general without seeing headlines about the single-family home being in such high demand. Over the past several months I have read many articles on this topic to try to determine if this is simply a fad or if this demand is going to have staying power.
I definitely want us, as real estate investors looking for sustainable returns and equity growth potential, to fully understand the situation. After all, Wall Street investors have been buying thousands of single-family properties for investments. Their original plan was to hold them short-term, build quick equity and liquidate for higher prices. But now they appear to have extended that hold time. This is for good reason; quite simply, it is a lucrative, sustainable investment.
I have uncovered dozens of reasons why these single-family home have been so popular, and eight really stand out. Three of these are actually driven by the demand for renting them, and another five are driven by landlord desires.
3 Reasons Why Tenants Prefer the Single-Family Rental Home
- Displaced families during the housing shortfall: When family members lose their home due to economic hardship, the last thing they want to do is move into an apartment building. They are already humiliated over the loss of their home and are eager to resume a life that mirrors the one they were living before. They want a place with a yard for the kids and the family pet, and they want a place that will make them feel like it is their home. Maybe they no longer could afford the larger house they lived in, but they definitely want to live in a house.
- Baby Boomers: Many adult children (Millennials, or so-called “basement kids”) who have lived with their parents over the past decade are now finally getting jobs and moving out. This is creating more households (which also adds to this segmented growth). This finally gives their aging parents a chance to sell their large family homes and downsize to smaller homes. Their homes of choice: smaller single-family rentals. As this group finally becomes empty nesters, they now have a chance to enjoy life and are not interested in being tied down to the details of taking care of a house. Some like the mobility to be able to relocate and be near their grandkids.
- Peace of mind: For many, the “American dream” of owning your own home has been shortened to simply having your own home. People are finding comfort in having their own home without the stress of being tied down to a mortgage. They like the flexibility and freedom that renting provides them.
5 Reasons Investors Desire Single-Family Homes as Investment Property
- Single-family homes are highly sought-after: Stating the obvious, if the rental demand is there, it makes for a great business model.
- Fewer management headaches: The average renter household today consists of two adults, one child and a pet. A single-family home fits this need the best. These people tend to have more belongings and like the feeling of a home, so they tend to reside in one place much longer. They also tend to be responsible for their own utility payments, lawn care and have fewer expectations from their landlord. They ultimately want to be left alone. So as long as they take care of the place and pay their rent, they are fairly easy to manage.
- Strong equity growth: Equity growth is poised to be strong for single-family homes. With growing population, aging population and thousands of new households being formed, the demand is huge for the smaller, modestly priced home. The supply is much lower than the demand, making way for great capital appreciation. The median priced home within a city has always been the most highly sought-after property, so the appreciation is optimal.
- Most liquid investment class: The houses that make the best rental investment also tends to be the houses that hover around the median price of homes in the area. This is the most highly sought-after property, making it the easiest property to sell. The higher demand for these properties allows investors to sell their properties to the retail buyer (the end user).
- Affordability and financing: Many more people can afford a single-family home with prices today of quality homes being lower. Financing options are more readily available and at a lower cost. Single-family homes only need residential financing, which is the easiest to acquire and offers the most options.
Fewer people own their homes today, yet have a consistently strong desire to live in single-family homes. That has paved the way for a very lucrative business of renting those single-family properties.
The largest holder of single-family properties (American Homes 4 Rent) has recently completed a merger with American Residential Properties. They now own 47,000 homes across 22 states. This should help convince those individual investors out there that the single-family rental market is indeed a strong and viable business. It is very well known that the individual investor offers better service to tenants than a big mass production company does.
So with the high demand by tenants, an incredible exit strategy of selling to retail buyers at optimum times and a proven lucrative business model that has Wall Street excited and doubling down on its investments, the private investor can be confident of a great and prosperous future in single-family home investing.