What is a Single-Family Rental?

A single-family rental (SFR), otherwise known as purpose-built SFR properties, are build-to-rent (BTR) communities. These communities are built exclusively for rental purposes and are a driving force behind investor interest. The two main product types of single-family rentals are build-to-rent single-family attached and build-to-rent single-family detached. Attached assets generally provide two or more bedrooms and are, on average, larger than a single multifamily unit but not as spacious as a typical two-plus bedroom home. Detached rentals are primarily found in suburban neighborhoods and platted on individual lots. These homes often include three or more bedrooms and are significantly larger than a multifamily unit. Build-to-rent communities also can include apartment-like amenities, such as a pool, clubhouse, and fitness center, intriguing renters who do not want to give up the perks of multifamily living.

Single-Family Rentals in Today’s Market

The SFR market has sufficiently increased in supply, demand, and interest. The arrival of COVID-19 spurred a conversion from working in office to working from home, allowing renters to escape cramped living quarters close to city centers and migrate to suburban developments. Along with this, the millennial generation is growing older and starting families, causing them to look for housing with more room and privacy.

Home shortages and rising costs across the nation forced young Americans to reevaluate homeownership and consider renting for extended periods. But as they grow older and begin to start families, apartment-style living becomes less appealing, and they search for alternative options such as renting a single-family home.

The median list price for an existing single-family home in the United States was $428,500 in July 2024. This is a 1.02% decrease from the previous month, but a 4.21% increase from the previous year.(Source)

 

Commercial real estate institutional buyers, private equity groups, and developers have noticed and are investing billions of dollars into the sector to take advantage of the accelerated expansion. However, the trend has encountered a sudden obstacle—higher mortgage rates and a limited inventory.

Construction began on about 18,000 single-family built-for-rent homes in the first quarter of 2024, a 20% jump compared with the first quarter of 2023. (Source: National Association of Home Builders)

 

High Mortgage Rates’ Impact on SFR

One of the primary culprits hindering consumers’ ability to transition from renting to owning is the surge in mortgage rates. High mortgage rates have had a direct impact on the number of available homes, as existing homeowners with low mortgage rates are hesitant to list their residences and give up their lower mortgage rates. While rates have slightly decreased from their peak of over seven percent in late 2022, they still remain high compared to the levels seen late 2021. These high rates have placed upward pressure on investors and have forced others to adopt a more cautious investment approach.

The decline in investor home purchases does not necessarily translate to a decrease in interest in single-family houses. Redfin Senior Economist Sheharyar Bokhari highlights that while investors have reduced their home purchases, they still acquire a larger share of homes compared to pre-pandemic levels. According to Redfin, real estate investors bought 26.1% of low-priced U.S. homes that sold in the fourth quarter of 2023. That’s the highest share on record and is up from 24% a year earlier. By comparison, investors purchased 13.6% of mid-priced homes that sold (vs 14.3% a year earlier) and 15.9% of high-priced homes that sold (vs 15.4% a year earlier). Investors have shifted their focus to more affordable properties and can capitalize on the potential returns and opportunities in the market, especially in the realm of single-family homes.

Single-Family Rental Development

The single-family rental market growth has reached across the U.S., specifically in middle-sized markets that offer a lower cost of living than major metros. As a share of all housing starts, single-family built-for-rent starts grew to 10% in 2023 from 5% in 2021, almost doubling in two years, according to the National Association of Realtors. When looking at the data by region, there was a notable two-year growth in built-for-rent single-family homes in the Midwest, where it is now 13% of the market, up from 5% in 2021. The Northeast also saw a two-year rise from 3% to 9%. The increase in the South was smaller, at 9%. The West has the smallest share, at 8%.

Some experts say improving rental supply is a viable solution to the ongoing affordable housing crisis facing the nation. In contrast, others say it’s a gateway for excessive rent rates and lowering private investors’ buying power. As renters search for additional square footage, more privacy, and reasonable pricing, the single-family rental market will be a focus for commercial real estate investors.

Single-Family Rentals vs. Multifamily

With the emergence of single-family rental assets, multifamily investors have begun looking at which asset type best suits their investment criteria. The SFR market is witnessing booming demand and has multiple positive aspects, but multifamily products offer opportunities that single-unit homes do not. Working with a specialized expert and strategizing which product fits the investor’s budget, time, and long-term goals is key.

Multifamily investments can be extremely profitable, but they are also more challenging and complicated. Working with a specialized agent can help investors identify which asset best fits their criteria.

Pros and Cons of Single-Family Rentals and Multifamily Investments

Institutional Interest

According to CoreLogic, 85 percent of consumers prefer single-family homes, but with a low for-sale inventory and slowed construction, these homes are far and few between. This has caused limited availability and price increases, pressuring potential buyers to pivot and look to rental opportunities, such as SFR units. The national year-over-year single-family rent percentage has increased for each price tier under the sector. Price tiers are defined by the following: low tier, 75 percent or less than the regional rental rate average, lower-middle tier, 75 to 100 percent of the regional rental rate average, high-middle tier, 100 to 125 percent of the regional average rental pricing, and high tier, 125 percent or more of the regional average rental rates.

U.S. Single-Family Rent Index – July 2024. U.S. rent growth rebounded in May, with the 3.2% annual gain marking the highest gain in more than a year. (Source: CoreLogic)

As the market expands and produces more profit, investors play a major role in the consolidated, institutional ownership of single-family rentals. With a lower percentage of tenant turnover and relatively cheaper startup costs, large buyers are looking to take advantage of the limited U.S. housing supply and rising rent by buying purpose-built housing developments or existing single-family residences. This could be a risk for private investors as institutional investment drives up property taxes, insurance costs, and government regulations. It’s important to note, although established companies are looking to enter the SFR space, they only make up a small percentage of the overall buyer pool. Private investors make up 85 percent of single-family rental home purchases.

Markets Seeing the Most Activity

The single-family rental market is expanding nationwide, but some markets fit the investment criteria better due to population growth and high rent rates, such as Phoenix and Las Vegas. Other top markets are located along the U.S. Sunbelt, which is home to some of the hottest SFR markets because of their rapid population growth, fueling a for-purchase shortage. These markets make prime locations for private equity companies, institutional buyers, and commercial real estate developers to invest in single-family rental communities.

What’s Next?

The recent decline in investor home purchases reflects a shift in the real estate market, indicating the challenges faced by both investors and potential homeowners. While investor activity in single-family rentals remains relatively strong, it poses challenges for individual buyers seeking affordable homes. The impact of rising mortgage rates, limited inventory, and declining prices requires close monitoring to navigate the evolving real estate landscape successfully.