Two likely winning strategies in times of tight entry-level supply
Tough news for first-time homebuyers: availability of affordable homes is declining. According to the National Association of Realtors, availability of homes under $200,000 declined by 19 percent year-over-year from January 2019 to January 2020. The average sale price of a home is nearing five times the income of the average potential first time buyer.
The American Dream of home ownership is under attack, with several factors creating a challenging buying environment for first-time buyers. It’s an issue that everyone in the real estate industry needs to solve, whether you are a builder, investor or lender.
Millennials Push up Demand
Millennials are the fastest-growing demographic (4.8 million Millennials turn 30 this year), creating significant demand for entry-level housing. Millennials also carry a significant portion of the overall $1.6 trillion in student loan debt. This, combined with the tight inventory, is keeping many potential first-time buyers on the sidelines.
Investors See Low-Cost Capital, Solid Potential Returns
The laws of supply and demand are further exacerbated by the low interest rates leading investors to buy up available entry-level homes. SFR investors are always on the hunt for high-quality entry-level housing. Low interest rates (as low as 2.98 percent in mid-July) make investing very attractive in the current market. This is causing further upward pressure on entry-level home prices.
What Are Some Solutions?
One strategy we’ve advocated for is complete Build-to-Rent neighborhoods. Millennials still want a house with four sides and a yard as they start to grow their families. They are often prime candidates for rentals, making an entire rental community an attractive housing option.
Building an entire community with the express purpose of renting is a solid strategy for SFR investors, as demand is high and interest rates are low. We see partnerships to develop SFR communities between builders and investors as a growing trend.
We also have had success with Rent-to-Own scenarios. Maybe people can’t afford a full down payment today, but they still fall in love with an SFR property. Working with them over time to become owners is a win-win for investors and potential homeowners alike. Investors get a positive cashflow property for a few years, then are able to sell it at market value. Potential homeowners see this as a bridging strategy between renting and home ownership.
These strategies show that there are innovative ways to make money in SFR investing. We expect SFR investors to see solid returns in the coming years, as tight supply and increased Millennial demand for high-quality rental properties continue. Overall, the outlook for SFR investing remains bright.
Bruce McNeilage is the managing member and a co-founder of Kinloch Partners and a partner in Harpeth Development.. He is a passionate advocate for housing affordability and homeownership, and invests heavily in Nashville, Tennessee, as well as throughout the southeast. Learn more about his projects, including single-family built-to-rent communities and the Solo East and North condominium projects at www.Kinlochpartners.net.