According to a panel of six premier experts in the investment industry, 2018 is going to be a good year for single-family rentals (SFR). Although, as always, the local market is everything. During the opening session of IMN’s 6th Annual SFR Investment Forum (West) on December 3, 2017, in Scottsdale, Arizona, the panel discussed the national economy, supply and demand across the country, warning signs of trouble ahead for certain markets, and the state of the SFR Industry.
Dennis Cisterna, CEO of Investability Solutions, moderated the panel. Thos we sat on the panel are: Jasraj Vaidya, director at Amherst Capital Management; Daren Blomquist, senior vice president of communications at ATTOM Data Solutions; Dan Blood, senior managing director at FBR Capital Markets Corporation; Alex Villacorta, executive vice president of analytics at HouseCanary; and Gary Beasley, CEO and co-founder of Roofstock.
The Economic Outlook is Good for SFR
Cisterna started the discussion off with some very positive gross domestic product (GDP) numbers. Q3 2017 GDP was up 3.3 percent over Q3 2016, he observed. But follow that with a question: “Is economic growth going to slow down in the year ahead?”
Panelists responded that in this case, most of their analyses felt like looking for “the cloud to go with the silver lining.” Blood said his company is looking for at least “a good 12 months” in front of us. And added he would not be surprised by another 18 to 24 months of growth before things level off. All panelists said that one of the biggest issues for SFR investors in 2018 would be dealing with supply and demand issues.
More Households Opt to Rent, not Buy
Blomquist observed, “Younger generations of new households are forming and entering the market. But they value mobility and the wages are not there to enable them to buy [a home].” Cisterna added, “The bottom one percent of mortgages are going to people with credit scores around 620, whereas historically those mortgages went to people with scores in the mid-500s. Millions of people do not have a choice [but must rent rather than own].” Markets in which the demand for rental housing is present along with affordable sales prices for investors represent ideal targets for SFR investors in 2018.
Markets with a population of Baby Boomers who are selling their homes often represent good potential investment locations for SFR investors. Because those homes are often outdated, needing updates and repairs before retail buyers would be interested in purchasing them, observed Vaidya. Thanks, in part, to Boomers opting to remain in their homes longer than most analysts expected, there is a limited inventory of move-in-ready properties both attractive and affordable to first-time buyers. Investors who purchase these properties and upgrade them often find themselves ideally situated to either rent or sell at retail once the rehab is complete.
This issue is compounded by nationwide trends toward longer tenures for homeowners. Blomquist said in Q1 2000, people remained in their homes between four and five years. This number started to climb during the housing crash. And, today, is closer to eight years. This extended tenure can be problematic for markets because current homeowners do not move up. Which decreases the demand for new homes at price levels that developers are willing to build, and first-time buyers. Who historically would have purchased the homes vacated by “move-up” sellers, have little to choose from in the way of inventory.
This is not necessarily bad news for SFR investors, however. If they offer affordable, modern rentals to those would-be first-time buyers. The key, Beasley said, is to find the “Goldilocks” place where there is demand for housing. But also where investors can still afford to make astute purchases that allow room for returns.
What Markets are Ripe for Single-Family Rentals in 2018?
According to the panel, the best places in the U.S. to invest in SFR properties in 2018 will offer both low acquisition prices and higher rents. “The Midwest and the South are interesting,” said Villacorta. He called secondary and tertiary markets, those near but not within the metro areas of larger cities, “the new frontier” in opportunity for real estate investors seeking SFR investment vehicles. He added that when secondary and tertiary markets come into the picture, opportunity is available everywhere. “For example, in Denver, near the airport and north of the city, there are opportunities,” he said.
The IMN 6th Annual SFR Investment Forum (West) is happening right now in Scottsdale, Arizona. Check back for more exclusive Think Realty coverage of this influential industry event.