Even with the rise of institutional investors that began investing heavily in SFR during the post-recession years, small-scale investors still remained king. Today, less than 2% of all SFR homes are owned by institutional investors. Meanwhile, 87% are owned by investors with fewer than 10 units.
Thanks to the rise in tech and tools that are making SFR investing and management easier than ever, we’re seeing the rise of a new class of investor: the midsize investor.
“The biggest increase in market share over the past year has come among investors owning six to 10 single-family rentals, followed by those owning between 11 and 100 rentals,” said Daren Blomquist, senior vice president at ATTOM Data Solutions. “These smaller to mid-tier investors are benefiting from newfound efficiencies in acquisition, financing and property management that allow them to buy outside their backyard in areas with higher potential returns, and to leverage their money to buy more properties.”
While these tools and solutions were once available for institutional investors, they’re slowly making their way into the hands of everyday landlords, enabling them to expand their operations and portfolios in a way that just wasn’t possible even a few years ago. It’s certainly a change I’ve noticed.
Property management is changing as well.
Ten years ago, operations within the property management sector were highly fragmented. Today, however, property management solutions are becoming more efficient. Large-scale managers are able to manage these properties at scale. We’re talking hundreds or even thousands of properties.
It’s also becoming increasingly easy to build a remote portfolio, something that enables investors to take advantage of better housing markets instead of limiting them to what’s available in their own backyard. Investors can search for properties by price, location, size and the usual parameters, while investor-specific software, including the software my firm offers, enables them to get more granular with their search and look for localized housing market data.
The Rise Of The Midsize Investor
Being a smaller investor offers a number of advantages when it comes to investing in SFR.
While institutional investors primarily focus their efforts on a small, concentrated number of markets across the country, smaller investors have more flexibility when it comes to diversifying their portfolios and investing in different markets. They’re able to follow the yield, so to speak, turning their attention to up-and-coming areas or secondary markets — areas that are beginning to come into their own as housing prices continue to rise.
These areas, often labeled up-and-coming, may be less glamorous than their metropolis counterparts, but they often prove to be ideal locations for SFR investments. For one thing, the price-to-rent ratios are often much more attractive, while yields tend to be higher. Properties in less densely populated areas are also better insulated against a downturn in the housing market as well. Meanwhile, properties in saturated markets are currently performing the worst.
Of course, all of this begs the question: Where are these investors buying SFRs?
Recently, PWC and the Urban Land Institute published a report, “Emerging Trends in Real Estate 2020.” It’s a fascinating read. Instead of listing potential markets for SFR investing, let’s discuss the type of communities that are attracting millennials, called out in the report as “hipsturbia.” These are suburbs that offer a hip live-work-play, walkable community. “Suburbs are taking a chance on mixed-use, walkable, millennials-attracting development,” the report states.
With the right recipe, these suburbs will create a replicable model that will be copied by others. I see this as a trend that will only grow in the years to come. These suburbs include:
• Charleston, South Carolina.
• Columbus, Ohio.
• Tempe, Arizona.
• Evanston, Illinois.
• Decatur, Georgia.
• Alpharetta, Georgia.
• Boise, Idaho.
• Jacksonville, Florida.
There are too many to list. I like to focus on areas that are just outside of larger metro areas, called ring communities. They have embraced the hipsturbia model, and many offer great jobs, affordable housing and a sense of community that is lacking in the middle-of-nowhere, track-housing suburb and exurb areas.
According to an analysis by the property management software firm Buildium, these emerging markets are acquiring residents twice as fast as the national average, gaining jobs more than twice as quickly and seeing home values grow 50% faster as well. They’re also seeing 20% faster rent growth than the rest of the country.
Many investors are increasingly turning to smaller, lesser-known markets, particularly in locations that are just outside of hot property markets. In short, they’re going where the yield is.
Signs Of An Up-And-Coming Housing Market
Looking forward, investors are advised to look for low-risk, high-return counties, with potential gross yields of at least 10%. Look for property taxes that are lower than 1% and vacancy rates of no more than 5%.
Here are a few factors that could indicate an up-and-coming market:
• Population growth gaining residents twice as fast as the national average.
• Job growth gaining jobs more than twice as fast as the national average.
• Housing price growth 50% faster than the national average.
• Average cost of living index on par with the national average (so staying is affordable for residents).
• Rent growth around 20% faster than the national average.
• Wage growth where average wages have grown over the past year.
• Low vacancy rates at less than 5%.
• Potential annual gross rental yields of 10% or higher.
• Healthy rent-to-household-income ratio — less than 30% is ideal.
• Property tax less than 1%.
Primary markets may be approaching their peak, but there are opportunities to be found in secondary markets. For best results, establish your investment criteria, and know what to look for. Finally, always assess a market on a case-by-case basis, evaluating it for its merit, rather than buying into the hype.