October 19, 2023
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Despite high mortgage rates, inflation, and limited housing supply, investing in real estate can still be a lucrative option.
Despite high mortgage rates, inflation, and limited housing supply, investing in real estate can still be a lucrative option. One particular area of the market that is gaining traction is single-family rentals (SFRs). According to Moody’s Analytics Senior Economist Ermengarde Jabir, SFRs have consistently performed well and offer attractive returns for investors.
During the aftermath of the Great Financial Crisis, there was a notable shift in single-family rental ownership. Institutional investors began entering the market, taking advantage of the foreclosure of many single-family homes. While this benefited the institutional investors, it also prevented the market from hitting rock bottom.
Currently, the single-family rental market is thriving, with stabilization and marginal-positive growth. The demand for single-family homes has increased due to a severe underbuilding of housing across the country. Many millennials, who were hit hard by the 2008 crisis, are now priced out of homeownership, making single-family rentals an attractive option.
The rise in home prices and high mortgage rates have pushed more people towards renting instead of buying. This shift, particularly in the single-family rental market, is driven by the desire for a traditional American dream of living in a house with a backyard or in a good school district. The substitution effect has made renting a single-family home more affordable for these individuals.
In terms of investment value, single-family rental gross yields are higher than multifamily capitalization rates. This indicates that there is still untapped value in the single-family rental market. Builders are even diverting resources from the single-family purchase market to the single-family rental market, further tightening supply and benefiting investors.
While performance varies across different markets, there are several top single-family rental markets with high gross yields. Interestingly, these markets have little institutional presence and may not necessarily have experienced significant house price appreciation. However, there is a demand for rental housing due to affordability issues, resulting in higher rents.
For investors looking to enter or expand their portfolio in the single-family rental market, these top markets with high yields and low rent-to-list ratios are worth considering. Prices are still attractive, especially in markets where institutional players have yet to make their mark.
Overall, the single-family rental market is positioned for long-term growth and offers a favorable investment opportunity. With the value still to be captured and the ongoing need for rental housing, it continues to be a promising sector for investors.
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