Are Single Family Rentals Still a Good Investment?

for-rent-twoWith discount-priced foreclosures drying up, are single family rentals still such a good investment?

The foreclosure floods over past four years created unprecedented opportunities for investors to buy homes for a song, rehab them, and either resell or rent them out. Some four million homes switched from owner-occupancy to rentals during that period—that’s nearly homes as many as total sold in America each year.

The market is changing

Those days are clearly over. The flow of foreclosures and short sales has dried up, accounting for only 10 percent of the market. Today investors are buying only about 14 percent of residential sales, down from 25 percent in 2009. Yet new investors are still entering the single family rental market and about 14 million homes are now rentals.

The reason can be summed up in two words, “cash flow.” Few investments deliver two ways to profit, but the attraction of single family rentals is that they deliver monthly rent while they appreciate in value like other residential properties.

Today’s market dynamics are a good example of why millions of investors are sticking with their rentals despite the changing market. Though the days of quick profits from flipping are over, the appreciation side of the equation is still strong. Those investors who bought in during the housing crash have done very well, realizing 20 to 30 percent appreciation. Their profits are being augmented by the nationwide shortage of affordable starter homes, which is pushing prices in lower tiers up faster than any other segment of the market. Most rentals are two bedrooms or smaller.

The best news for investors is on the rental side

Rents are soaring and vacancy rates declining, making it easy for landlords to keep their properties rented, and their rental income is even outpacing inflation. In the nation’s hottest real estate markets—Denver, Dallas, San Francisco, San Jose—rents are rising fastest, keeping pace with home price appreciation. Thus, there’s little incentive for renters to buy. Even in moderate markets, Millennials are creating extraordinary demand for rentals.

It’s easier than ever for investors to add a rental property to their portfolio. Companies like Memphis Invest and HomeUnion provide turn-key service to investors, locating and buying properties, arranging financing, and managing.

“There are an increasing number of renters in the U.S. We believe this increasing demand for residential rental space will enable SFR investments to continue producing high yields,” says HomeUnion CEO Don Ganguly.

What does the future hold?

The rental boom’s days may be numbered, though. A corresponding boom in apartment construction is underway, adding 300,000 to 400,000 new units to the rental inventory each year, most in markets popular with Millennials. The flood of new apartments is expected to slow rent growth to 2 or 3 percent per annum in the next two years, but as long as occupancy rates remain favorable, investors in single family rentals should continue to do well.