Single-family rentals (SFR): What you need to know

Investing in Single-Family Rentals (SFRs) has gained momentum in real estate as investors seek alternatives to traditional markets. SFRs offer a stable income stream and long-term appreciation potential while not being directly correlated with the stock market. SFR real estate is an attractive option for investors looking to diversify their portfolios or reduce exposure to public markets.

Single-family homes comprise a substantial portion of the U.S. housing market, with approximately 90 million single-family homes in the country representing about two-thirds of all housing units. Of these, 15.8 million are SFR units, making them a significant part of the U.S. rental market. Let's explore the ins and outs of SFR investments and their relevance in today's real estate market.

## What is SFR in real estate?

A Single-Family Rental (SFR) is a standalone home rented out to tenants. These homes are especially attractive to families, as they offer more space, privacy, and access to outdoor areas than apartments or multi-family housing units. Situated mainly in suburban areas, SFR properties are popular with tenants looking for family-oriented living arrangements.

The trend of renting single-family homes has been increasing, especially since 2004. For instance, the number of married couples with children renting homes has risen by 680,000 from 2004 to 2018, as more families choose renting over owning due to high home prices.

## How does SFR investing work?

Investing in SFR real estate is relatively straightforward. An investor buys a single-family home, rents it out, collects rental income, and later sells the property when its value appreciates. The profit potential comes from the net operating income (NOI)—rent collected minus operating expenses—and future home price appreciation.

Investors should carefully consider location, property condition, and market dynamics to maximize returns. Operating expenses like property management, maintenance, and repair costs also play a crucial role in determining the profitability of an SFR investment.

While SFR investing is accessible to individual retail investors, who account for 88% of ownership in this market, institutional interest has grown since the Great Recession. Professional management companies have made operating more extensive portfolios of SFRs more efficient.

## SFR in the wake of COVID-19

The COVID-19 pandemic dramatically increased demand for SFR properties. In April 2020, demand for portfolios of five or more single-family homes surged by 650%. The following factors contributed to this:

* Social distancing and remote work boosted demand for homes with outdoor space, separation from neighbors, and home offices.
* Rising unemployment and financial strain caused many to seek more affordable rental options.
* As families and working professionals prioritized space and lower-density living, suburban SFR properties became popular.

These trends will likely continue as the work-from-home movement grows, and homeownership remains out of reach for many.

## Types of SFR investment strategies

There are two primary ways investors engage with SFRs:

1. Direct Ownership: Investors buy one or more single-family homes, managing the rental process directly or through a property management company. The fragmented nature of the SFR market allows local investors to leverage their knowledge of specific areas.
2. Institutional Ownership: Institutional investors often acquire portfolios of SFR homes. Despite their more extensive scale, these investors hold only about 1% of SFR units, but the market is evolving as new technologies make it easier to manage large portfolios.

## Key trends driving SFR demand

Several economic and demographic trends have made SFR investments particularly attractive:

#### 1. Preference for renting over buying

Millennials, the largest living age group in the U.S., are increasingly opting to rent rather than buy. Renting provides greater mobility, allowing for flexible lifestyle choices, including job changes and travel. Rentership among older age groups, such as Baby Boomers, has also increased as they look to downsize and avoid the responsibilities of homeownership.

#### 2. Homeownership is becoming unaffordable

Home prices in the U.S. have been rising faster than wages, with approximately 80% of U.S. markets seeing this trend. This disparity has forced many prospective homeowners into renting, especially in large metropolitan areas where housing demand is highest. For many, owning a home is not feasible until later in life.

#### 3. Rising rents for SFRs

Rental prices for SFR properties have consistently increased, with a 3% year-over-year rent rise. This steady growth makes SFR investments a potentially lucrative source of ongoing rental income for investors.

#### 4. Shortage of affordable rentals

While there is a high demand for rentals, new construction has been slow to keep pace, especially for moderately priced rental properties. As more families seek affordable homes in the suburbs, the SFR market continues to expand, providing investors with opportunities to fill the gap in supply.

## Pros and cons of SFR investing

#### Pros

* Steady Income Stream: Rental income can provide consistent cash flow, making SFRs an appealing long-term investment.
* Appreciation Potential: Over time, homes can appreciate in value, allowing investors to gain capital upon sale.
* Demand Growth: The pandemic and changing demographics have increased demand for single-family rentals, further strengthening the market.

#### Cons

* Management Costs: Managing an SFR portfolio can be costly, especially for individual investors without access to large-scale management systems.
* Market Risk: Real estate prices can fluctuate depending on economic conditions, impacting rent and property values.
* Liquidity: SFRs are not as liquid as stocks or other investment vehicles, meaning investors may need to wait for favorable market conditions to sell.

## Conclusion

Single-family rentals (SFRs) offer retail and institutional investors a unique opportunity to diversify their portfolios with stable, income-generating assets. With rising demand for rental properties and the flexibility to sell individual homes or portfolios, SFRs represent a growing real estate market segment. However, investors must weigh the benefits of rental income and appreciation against property management costs and potential market risks.

Whether you are an experienced investor or just entering the real estate market, SFRs provide a valuable alternative to consider.

Investing in Single-Family Rentals (SFRs) has gained momentum in real estate as investors seek alternatives to traditional markets. SFRs offer a stable income stream and long-term appreciation potential while not being directly correlated with the stock market.

Single-family rentals (SFR): What you need to know

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