Single-family real estate is emerging as an exciting asset class, presenting savvy investors with viable investment opportunities.
Current low-interest rates, combined with steady job growth, advances in technology and dissatisfaction with other investment forms, have made single-family real estate investments a lucrative and sustainable source of passive income.
A 2018 survey conducted by Millennium Trust Co. found that investors are favoring alternative investment options, including real estate, with 73 percent of survey participants favoring single-family rentals. Over one-third of rental properties in the United States are single-family rental homes, and this number is projected to increase as more potential stakeholders begin to seize this high-yield, turnkey investment opportunity.
A new asset class in the making. Single-family real estate is defined as one to four units financed by a conventional mortgage, while a commercial mortgage is designated for properties consisting of five or more residential units or commercial property.
In the past, single-family real estate investments were dominated by private mom-and-pop investors who would purchase a handful of units and transform them into rental properties, thereby becoming “accidental landlords.” Often, these accidental landlords would rent out properties they had originally lived in and later moved but were unable to sell.
The original mom-and-pop model began to change considerably around 2012 when large companies and private equity firms started buying single-family real estate. As private equity made major investments in single-family real estate, this property type emerged as a legitimate investment class.
In short order, private equity firms capitalized on single-family real estate as a dependable form of investment that produces a reliable yield. Not surprisingly, other investors took notice and thus began the reshaping of how the real estate industry perceives single-family real estate.
Fast-forward to 2019, more investors are eagerly analyzing single-family real estate to predict how it will appreciate over time and strategizing how to scale this type of investment.
Key players in single-family real estate. Many institutional investors targeted residential real estate, primarily in the south and southwestern U.S., and high yields drove key players like Blackstone – one of the largest private equity firms in the world – to curate a rental portfolio comprised of roughly 100,000 single-family detached homes, operated under the name Invitation Homes. These rental homes provide yields and appreciation and often are publicly traded.
These portfolios of single-family detached homes are purchased as real estate investment trusts. By leveraging real estate investment trusts, real estate investors have gained exposure to an astonishing number of single-family homes across 10 states.
At least six companies have followed in Blackstone’s footsteps and created single-family home investment portfolios comprised of 30,000 to 50,000 homes. At least a dozen other companies own 15,000 homes or fewer, meaning that investors increasingly are taking advantage of the short- and long-term benefits of single-family real estate investment.
Comparisons to multifamily real estate. The market shows that there is a high demand for single-family real estate from large institutional players. However, there’s also a demand from individual investors eager to purchase single-family real estate assets that provide a strong, reliable return on investment.
When these investments can be managed seamlessly by experienced, reliable property managers, they become all-the-more appealing. In fact, great property management is a key to success in this investment class.
Technology presents new opportunities. Previously, geography was one of the primary reasons why single-family real estate wasn’t viewed as an investment-grade asset.
Before smartphones, apps catering to real estate and upgrades to property management software services, it was difficult to manage assets that were spread across multiple locations. Fortunately, advances in technology have made it much easier to manage properties, regardless of location.
Individual investors can hire qualified property management firms that will expertly manage tracts of real estate – from five to 5,000 homes. Investors, property managers and tenants are all connected through various forms of technology, including portals where investors can view financial statements, inspection reports and photos.
The future. The future of single-family real estate as an investment class is promising. Currently, there are over 16 million single-family rental homes in the U.S., yet by 2030, analysts predict at least 13 million new rental households.
With this new trend in real estate flourishing, it’s no surprise the demand for single-family rentals is at an all-time high with no signs of abating any time soon. Real estate investors across the country are taking notice and the single-family home is proving to be a remarkably strong and worthwhile asset class.