3 Reasons to Invest in Single-Family Rentals

A rental investment can be a safe haven in a volatile market.

FEW PEOPLE TALK WITH their financial advisors about alternative investments like purchasing a property, but real estate may be a good strategy this year. It’s one that more high net worth investors seem to be employing to cope with market volatility.

A December 2018 survey from Millennium Trust Company found an increasing preference for alternative investments, including real estate. Among those surveyed who held real estate, 73 percent favored single-family rentals.

Robert Mulcahy, senior vice president of production and strategic initiatives at Angel Oak Prime Bridge in Atlanta, says a rental property investment is a great strategy for any investor, regardless of net worth. The market gyrations of 2018 and the outlook for real estate in the year ahead are compelling reasons to examine the benefits of owning a rental property.

“Since markets don’t exist in a vacuum, there tends to be a beta between the rental market and the stock market,” says Jason Haber, a real estate agent at Warburg Realty Partnership in New York. The difference, he says, is volatility.

“The rental market is reactionary to the general direction of the stock market,” Haber says, meaning that daily swings in stock prices don’t effect real estate investors like equity investors. “Real estate investments provide for more stability, and many markets can outperform the Dow and S&P 500.”

That may be music to the ears of volatility-weary investors. Here are three reasons why now is the perfect time to consider a property investment:

• The 2019 outlook is strong.
• Housing is bolstered by low unemployment.
• Renter profiles are shifting.

The 2019 Outlook Is Strong

Quinn Palomino, co-founder and principal at Virtua Partners in San Diego, is optimistic about the outlook for leasing.

“Demand is high and supply is still constrained, particularly for entry-level housing,” she says. “We anticipate rent increases will outpace the overall commercial real estate market, landing in the 5 to 7 percent range.”

Palomino says these rentals are positioned to outperform stocks in 2019, as the market reacts to a slowdown in economic growth and recession fears. She cites the Great Recession, in which “single-family rentals did not have a down year in occupancy or rental rates.”

Housing Is Bolstered by Low Unemployment

Haber says that while the fundamentals of individual rental markets differ, two things are driving momentum: employment and interest rates.

“Generally speaking, a low unemployment environment translates into a stronger housing market,” Haber says. “Right now, we have both low unemployment and low interest rates. This dynamic has kept the housing market healthy.”

Additional rate hikes could give the single-family rental market an additional boost, says Nick Giovacchini, director of client services at AlphaFlow in San Francisco.

“With the Fed’s expectation of two more rate hikes this year, mortgage rates should rise once again,” he says. “(This) could potentially price some newer home buyers out of the market and keep them focused on rentals.”

Renter Profiles are Shifting

While low interest rates and job growth are leaving a positive mark on housing, Kevin Sneddon, founder and managing partner of the private client team at Compass in New York, says there’s a larger dynamic to consider.

“Renting single-family homes has become a new norm,” Sneddon says. He identifies three specific renter profiles that are fueling the new normal in the housing market.

The first is renters who can’t afford to buy because they lack a down payment on a mortgage. The second is those who don’t want to buy because they want flexibility. And the third group includes those who choose not to buy because they feel that real estate values will soften in the future.

Palomino says it’s largely millennials who are the main driving factor. “Millennials don’t have the same attachment to homeownership as preceding generations, are more transient and are overburdened with debt,” she says. “Yet, as millennial couples have children, they want to move out of the apartment and into a house with a backyard and garage.”[ 

It’s not just the younger crowd, however, who is on the hunt for homes to rent.

“As boomers are moving out of their previous homes, many are looking to downsize, but have less cash than expected,” Giovacchini says. As a result, they “may have to rent rather than purchase a new home.”

Those set on steering the course of single-family rental homes can benefit from doing their homework.

“The single-family rental market needs to be analyzed on a local level,” says Janine Yorio, CEO of Compound in New York. “We’ve seen tremendous discrepancies in rental growth and price appreciations across different locales.”

The biggest risk, she says, is the cyclical nature of real estate. Yorio makes a case for investing in multifamily properties through a real estate investment trust.

“Single-family investments at the individual level are far more risky than diversified REITs,” she says. “An owner needs to be ready for prolonged periods of vacancy, capital improvement requirements and dealing directly with problematic tenants.”

Yorio also says not all single-family residential investments are created equal: “It’s important to pay attention to more than just the initial rental yield or cap rate and pay attention to the near- and medium-term cash flow at the property level, taking into account required repairs and maintenance.”

There are also subtle differences in investing in a townhouse versus a single-family home. Town homes can carry fewer cost considerations regarding maintenance, repairs and landscaping if those expenses are handled by a homeowner’s or condo association.

Sneddon says the target tenant profile matters, as does your exit strategy. Most important, he says, is the likelihood that the asset will increase in value over time.

“Things like location, property condition, property style, local job growth, etc. are important factors to consider when selecting which single-family rentals to acquire,” he says.

Investors shouldn’t expect renting a home to be a passive investment.

“There’s a lot of work in being a landlord,” Yorio says. But outsourcing leasing or property management to a trusted team can ease the burden. 

By Rebecca Lake, Contributor