Many prospective first-time buyers cannot find a home that they can afford, or, even worse, overpay for their first homes, thanks to the legions of investors in single-family rentals (SFRs), whose cash offers often beat out bids from other buyers. Competition with investors is one of the reasons 19 million millennials who want to buy a home and have the income to do so are still renting.
“If it weren’t bad enough out there for first-time homebuyers, the additional competition from investors is increasingly pushing starter homes out of the reach of many households,” CoreLogic’s Deputy Chief Economist Ralph McLaughlin recently told The New York Times.
It is hard to fault a seller for preferring a cash offer over one backed by a mortgage, especially one from a first-time buyer who has yet to be approved. More than one out of four applications for purchase mortgages fail to close each month.
Still, many investors don’t pay all cash and rely on mortgage financing, which allows them to leverage the size of their cash investment, just like homeowners. About one in five purchases by small investors finance one-third or more of their investments. “Small investors” are defined by researchers at the Federal Reserve as those who purchase between three to 10 properties.
However, it is true that investors in single-family rentals prefer the same starter-sized homes sought by first-time buyers. According to CoreLogic, the share of starter homes purchased by investors peaked at over 1 in 5 homes over the past two years. “It’s a truism that homebuyers today are more likely to cross paths with investors during an open house than at any other time in the past two decades,” McLaughlin says.
Last year, investor purchases were the highest on record and nearly twice the level before the 2008 housing crash. Through the balance of 2019 and the first half of 2020, conditions for investors will continue to favor them over first-time buyers.
Here are four reasons why:
1. Investors are less sensitive to rising prices than homebuyers
Today’s high acquisition costs make investing more challenging compared to eight years ago when thousands of foreclosures were available, but not impossible.
Investors look to “cap rates” rather than prices alone. Cap rates (or “capitalization rates”) are the ratio of net operating income (rent) to the value.
Many of the markets that missed the housing boom and bust or markets that have not yet reached their boom-era peaks are attractive to investors because of their potential for appreciation. These markets are also where millennials are most likely to cross paths with investors.
2. SFR rents are rising as fast or faster than home prices
Rising rents are good news for investors and bad news for millennials who are trying to save for a down payment. CoreLogic’s Single-Family Rent Index (SFRI), shows that single-family rent increases peaked at 4.1 percent but are still rising at a 3 percent annualized rate through April. Less expensive SFR rents are rising at 3.6 percent year-over-year.
Ironically, demand from millions of millennials who can’t afford to buy has created a lack of supply in single-family rentals, and that in turn is sustaining rent increases. For young and growing millennial families who can’t yet afford to buy, single-family rentals are a more attractive option than apartments.
3. SFR Investing is easier today than ever
SFR investing’s popularity has spawned a mini-industry of support services, which makes these investments more available than ever before.
Several companies today provide investors with one-stop-shopping no matter where they live. These include purchasing, managing and selling properties. Businesses like Norada Real Estate Investments, HomeUnion and Roofstock make it possible for new investors to buy properties in many distant markets online. These sites contract with brokers, lenders and closing services in popular SFR markers and can expand quickly to cover emerging markets like Pittsburgh, Detroit and Colorado Springs.
Regional and national property management companies that specialize in single-family rentals have opened franchises across the country to handle management duties from finding tenants to repairing dishwashers. Software developed for management companies keeps service contracts current, checks tenant credit, manages appliance warranties to ensure timely maintenance and automates tenant requests and work orders.
Information on local SFR market trends and data is better and more accessible than ever
Today, sites that carry apartment listings also carry listings for rental homes. They make it easy for tenants to locate local properties, and some discuss single-family homes on their blogs. Sites like BiggerPockets, landlordology.com and realestateinvesting.com provide information and networking opportunities for investors.
4. Single-family investors have financing sources that are as good or better than those available to first-time buyers
With lower rates and the growth of single-family investing, more financing options than ever are available. They include conventional mortgages, “hard-money” lenders who make short-term loans at higher rates based on the value of the property, and “soft money” loans, like private investors and partnerships, and commercial real estate loans.
Several real estate investment trusts (REITS) invest in SFRs and sell shares on stock exchanges, and other investment companies have securitized their holdings and created single-family rental securities.
Since November 2013 there have been 48 rated single-sponsor borrower deals closed for a total debt of $29 billion. The two largest borrower/sponsors, accounting for half of the total, have been Invitation Homes, which has closed 13 transactions for $11.4 billion and Progress Residential with 11 transactions totaling $5.9 billion.
So far, 2019 is looking better than 2018 for investors.
“Buying single-family homes to rent them out is a better deal for investors so far this year than it was at the same time in 2018, as profit margins are rising in a majority of counties across the United States,” said Todd Teta, chief product officer at Attom Data Solutions in March.
“Last year, at this time, investors were seeing returns drop in three-quarters of the counties that were analyzed. So far this year, those margins are up in 6 out of every 10 counties analyzed.”
Steve Cook is a communications consultant and editor of Real Estate Economy Watch.