By Cameron Williams, Director of Research, SVN International Corp
Elevated interest rates and a limited inventory of houses are driving Millennials and Gen Z towards the single-family rental (SFR) market in search of budget-friendly initial homes. Currently, SFRs account for more than 50% of the U.S. rental marketplace, and financial experts this portion will expand in the future.
An analysis of a recent report conducted by Arbor Financial, a multi-family lender, highlights compelling advantages: minimal maintenance costs, steady additional income, and the potential for long-term appreciation. These factors make investments in single-family residences a highly appealing option in times of economic downturn.
SFRS ARE LESS VOLATILE THAN STOCKS
- Resilience in Market Instability: SFR construction starts reached record levels in 2022, even as other housing sectors declined.
- Historical Returns: According to the real estate fin-tech company Roofstock, SFRs generated consistent returns with less volatility compared to S&P 500 from 1992-2017.
- Risk & Reward: While the S&P 500 had annual returns of 35% or declines of similar magnitude, SFRs had a best-year return of 17.5% and a worst-year decline of just 2.5%.
ACCESS TO THE MARKET
- Lower Entry Costs: Single-family homes are typically cheaper than multifamily properties, requiring less initial capital.
- Capital Reinvestment: Investors can reinvest capital from one property into multiple properties, creating a growth snowball effect.
- Liquidity: Single-family homes are easier to sell due to a larger pool of potential buyers.
- Incredibly competitive to a traditional MF apartment, SFR is on average 33% cheaper per square foot and 54% larger by area.
LOWER MAINTENANCE AND REMOTE POTENTIAL
- No need for On-site Management: SFRs generally don’t require an on-site manager, unlike multifamily properties.
- Technology-enabled Management: Advances in technology make it easier to manage properties remotely.
- Geographical Diversification: In a 2022 survey conducted by property management company Mynd, 72% of respondents considered investing in properties outside their residing state or city.
A SMART HEDGE AGAINST INFLATION
- Cap Rates: As of Q4 2022, cap rates in the SFR sector increased by 5.6%, even when U.S. inflation was over 9%.
- Local vs National Impact: SFR values are more influenced by local economic conditions than national trends.
- Rental Demand: Rental demand has historically increase when mortgage rates rise, providing investment opportunities during economic downturns.