Current market conditions may be providing opportunity for those in the single-family home rental (SFR) market.

Freddie Mac reported the 30-year fixed-rate mortgage (FRM) averaged 6.35% as of May 11, 2023, down from the previous week when it averaged 6.39%. A year ago at this time, the 30-year FRM averaged 5.30%.

15-year fixed-rate mortgage averaged 5.75%, down slightly from the previous week, when it averaged 5.76%. A year ago at this time, the 15-year FRM averaged 4.48%.

“This week’s decrease continues a recent sideways trend in mortgage rates, which is a welcome departure from the record increases of last year,” said Sam Khater, Freddie Mac’s chief economist, in a prepared statement. “While inflation remains elevated, its rate of growth has moderated and is expected to decelerate over the remainder of 2023. This should bode well for the trajectory of mortgage rates over the long-term.” Additionally, the prices for homes are declining. New home prices peaked in April 2022 while prices of existing homes likely peaked in June after appreciation started to slow with the rise in mortgage rates in 2022, according to a report from the Urban Land Institute and PwC. Meanwhile, apartment rents have continued to push ever higher, but the pace has been moderating in recent months.

Market Opportunities

Nationwide, there was a decline in the share of the housing market comprised of single-family rental homes across 42 states. The share of the U.S. single-family housing market comprised of single-family rental homes declined 1.40% between 2011 and 2021, according to the National Rental Home Council (NRCH). However a recent analysis from NRCH shows the total number of single-family rental households was 3.10% higher in 2021 than in 2011. The market for these homes is very competitive with institutional investors controlling as much as 40% of U.S. single-family rental homes by 2030, according to MetLife Investment Management.

Single-family rental investors may have an advantage from tax laws. Investors are allowed to not only deduct many expenses, but they can also depreciate the unit. They also have access to lower cost of capital. Additionally, institutional investors that put together “horizontal apartment” portfolios can afford to pay more to be the high bidder for homes.

Demand for rental units is far outstripping new supply. Though population growth slowed sharply during the pandemic, demand is rising from the many young adults eager to start their own households after moving back in with their parents during the pandemic. Further boosting demand is the increasing number of younger adults choosing to live alone, the Urban Land Institute/PwC report said.

With strong demand, some SFR opportunities appear to perform better than others, most notably narrowly targeted subsectors (like student housing) and newer “niche” asset types. The rentals tend to do best in those areas that all types of residential housing are in high demand, such as in the Sun Belt, and in communities in other areas that have growing populations.

There is also an opportunity for those who want to invest in SFR properties designed for “younger” seniors who are still very active, do not need the same space they did while raising a family, want certain amenities like single-level accommodations and prefer the flexibility of rental payments compared to a mortgage. According to the Urban Land Institute/PwC report, single-family renters (of all ages, not just seniors) with rent budgets of $1,000-plus per month prefer to rent for more flexibility, less maintenance and fewer financial responsibilities than they would have as homeowners.

Technology Critical to Investors

Today’s SFR investors can more easily manage multiple properties than they once could by leveraging technology that enables them to handle all aspects of managing their properties – from acquisitions to leasing to receipt of rental payments, billing notices, past due notices, work orders and other management needs. There are facilities management solutions targeting large and midsized owners and operators as well as full-service acquisitions and property management solutions for longer-tail players. A new tech ecosystem that was designed around the nuances of single-family and scattered-site rental housing stock is rising to power and fueling the continued growth of this exciting asset type, according to the Urban Land Institute/PwC report.

Looking Ahead

Even though inventory is currently tight, there should be some new supply coming on the market. Nearly half of all master-planned communities are planning a build-for-rent section.

Urban Land Magazine reports that the build-to-rent (BTR) market is still poised for strong growth. BTR developers are expected to build 132,000 homes in the U.S. this year, up nearly 11% from 119,000 in 2022. Development should jump to 167,000 units by 2025.