Capital is rushing into single-family rental (SFR) housing. A tight supply of housing inventory in many markets is pushing builders/developers to shift strategies and focus on new developments.
The challenge for investors is how to deploy capital in a market where the competition for existing homes, and management inefficiencies is crushing returns. The solution has been to shift to new development. Build-to-rent strategies tend to work well in markets where building and land costs are less expensive and where there is a need for affordable housing.
Initially, investors found an entry to this market by buying up 10 to 20 homes within an existing subdivision. However, the evolution in the SFR market is building an entire subdivision of only-rentals with 150 to 250 homes concentrated in one location with community-amenities and on-site management like the multifamily industry
The community-style strategy is appealing for a variety of reasons. Aside from the benefits of buying newer properties, it also significantly reduces overhead and construction costs, especially compared to buying one-by-one on the MLS, auction, short sale, REO, foreclosure or any other source. It also creates management efficiencies by having a large group of homes in a concentrated location. Now the investment strategy becomes more efficient and it can be managed as a multifamily.
One of the inefficiencies of the SFR industry is management. Although SFR has good demand, performance still depends upon operational challenges, and a cost-effective management team.
The real issue for the investors is the ability to develop a great property management team to operate the assets. Some investors are concerned with those operating obstacles, and that’s the main reason why they keep a cautious’ investment strategy until the industry develops a better operating tool. So, despite how much investors are told that SFR must be part of their portfolio, some remain cautious.
Yet the management piece has become much more efficient as compared to several years ago when investors were just starting to build their portfolios. Today, there are more advanced processes and systems in place, such as management tools, and the investors and their property managers have learned how important it is to do preventative maintenance and renovations up front. In the early days, there was more operational risk, which required buying at a deep discount to create some added cushion on cash flow. Now, investors can get into SFR even with higher acquisition values, because they feel confident in their ability to operate rental homes and get the returns.