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What Can You Expect from the Single-Family Housing Market in 2022?

As we round out the first couple of months of the year I wanted to talk a bit about what to expect in single-family investing in 2022. It’s important to take the time to understand any changes or predictions in the market in order to choose the right strategy and set yourself up for a successful year. 

In November 2021, members of our leadership team attended the IMN SFR West Conference in Arizona. During the week they met with institutional and local real estate investors from all across the country. The main topic of conversation: what are we able to expect from the single-family housing market in 2022?

Suggested Listening: What Can You Expect from the Single-Family Housing Market in 2022

How can the normal investor trying to buy 20, 30, 40, and even 50 single-family houses capitalize as this industry starts to really take off? 

In this article, we dive into what we are seeing in all of the markets we are in, as well as predictions for the months to come. With all that being said, here’s our take:

Looking Back to Understand How Far the Industry’s Come

SFRs (Single-Family Rentals) was an undiscovered asset class before the recession. Warren Buffet was one of the first major investors to shine attention on SFRs saying: 

“Yeah, single-family homes— but if I had a way of buying a couple hundred thousand single-family homes and had a way of managing— the management is enormous— is really the problem because they’re one by one.”

Traditionally, big institutions put their dollars in multi-family assets and the apartment world, but the recession pushed values so far below replacement costs that they were able to start accumulating single-family homes for the first time. This is a trend that we’ve been seeing now for the last 10 to 12 years. 

The last few years have proven that there is an ability to make money in the single-family world and we’re beginning to see the masses realize this and flock to the space. 

Attention Leads to Innovation

With all this institutional and mass attention on SFRs, expect to see some world-class innovation in this area. 

Here are four innovations we at Evernest are keeping an eye out for:

  1. There will be better tech to find opportunities and automate your current portfolio. 
  2. Expect to find more talented vendors that will manage your portfolio vacancies, renovations, and repair orders more efficiently. 
  3. The agent space will allow for better partnerships with investors to speed up acquisitions. 
  4. The quality of rentals will also increase as more capital is flooded into the space which is a net positive and provides more of a reason for people to rent rather than buy. 

All of this paints a great picture for investors by making it easier to build up their housing portfolios. 

Single-Family Homes are in High Demand

It’s impossible to know exactly how long this market will persist but there are some interesting demographics that will make it possible to continue to capitalize on SFRs for the foreseeable future. 

The first demographic group is that “first-time buyer” that experts say is first striking out on their own at 30-39 years old, who make up 5% of the population. That means that anywhere from 1 to 7 million homes will need to be built in order to meet the demand of those renters and homeowners coming online. 

Investors should note that a good majority of this demographic are deciding to rent rather than buy because of high prices, which spells an opportunity for professional investors looking to snatch up 10-20 houses and not have to worry about vacancies amid such high demand.

Suggested Reading: Why Are Millennials Choosing to Rent vs Buy?

The New American Dream… Flexibility?

Another demographic group that will make for a great investment opportunity is baby boomers looking to downsize. 

Boomers are selling their houses and are looking to rent in order to have more flexibility to do things like:

  • Downsize from an empty house 
  • Travel to see grandkids and displaced children
  • Relocate to warmer climates during the colder months

The TL;DR? 65-year-olds don’t want to have to fix the problems that pop up around the house on the weekends anymore, they want to visit their grandkids or enjoy their retirement. Renting gives them the ability to do that, as that responsibility is taken off their shoulders and placed on the investors and property management companies like Evernest. 

(PS: Are you looking for a property manager? Contact our team about working with one of our property managers located in over 12 markets nationwide.)

There is also ample opportunity to cater to the millennial renter. A common complaint coming from millennials is that they are being priced out of homeownership… 

…but the real story most likely lies somewhere between high prices and a preference for flexibility. 

We’re beginning to see some innovation in the SFR space that didn’t exist 20 years ago, like a subscription to a furnished house that allows you to move every month if you so desire. Expect these types of housing shifts to continue into the 2020s and beyond.

Suggested Reading: 3 Reasons Baby Boomers Will Rent vs Buy

Offer Options Through Fractionalization

Professional investors need to constantly be aware of what the institutions are doing in their area to demand higher rent. Right now, increasing options both on the renter and investor level are gaining in popularity. 

One option being offered is fractioning off SFRs into separate rooms which have the possibility of providing investors with higher net cash flow. We first saw this in the early 2000s, in college towns especially, but for the first time ever we’re starting to see these options at the institutional level.

As the SFR industry continues to mature, we’re also seeing new kinds of investment strategies like fractionalized ownership. Unlike REITs, this new type of investment is specifically aimed at the single-family space. 

Companies like Roofstock are essentially splitting SFRs into shares, which can be a great way for new investors to break into the market without having to save too much capital on the front end. You can put as little as $1,000 down to enter the market rather than having to come up with a $30,000 down payment.

The Great Migration

People are moving away from California and New York in record numbers. The reasons might be varied, but what matters most is where they’re moving to

The “smile states”, aka the southwest to the southeast from Arizona to the Carolinas, are rapidly growing. The remote work revolution is allowing people to leave the higher cost of living areas to markets that are better for their pocket and their families. The best part of this new development is the fact that we’re still relatively early in this shift, so you can find ideal properties in these new states that will yield tremendous ROI as we ride the migration wave. 

Not only are people moving away from the coasts, they’re also moving out of city centers and into the suburbs as people continue to work from home. 

The reasons for this are simple:

  • People want more space. 
  • People still want to work from home. 
  • City centers are too expensive and crowded.
  • Priorities are beginning to shift away from cities to the cities’ edge and suburbs again. 

These areas have never seen this degree of migration before. Get in the market now and watch as the renters come pouring in. 

Does Migration = Higher Rents?

As people leave areas like California and New York, some markets like Memphis, Tennessee, are seeing price increases pushing 31% year-over-year. Is this due to the institutions trying to get the most yield possible? 

It really is just classic supply and demand. The people from these areas are used to paying higher rents and are willing to pay more to live in the houses they want. 

There’s more demand for these SFRs, but you can only push what the market can bear. They eventually have to come down to where the market is. Supply and demand are indicative of where people want to live. These “migrators” are renting houses so quickly that it just makes sense for landlords to keep pushing prices up. This, of course, has its limits and, at some point, you’ll see a correction that brings prices back down. 

Competing with the Institutions

The SFR industry is here to stay—the talent has never been better and the institutions are pouring money in like never before…

But how do investors like you build a solid portfolio in this new era? 

Like always, the right move toward success starts with understanding the current climate. Right now, that means understanding where the big money is being parked. Institutions are buying 18-20% of the homes in the sweet spot of $250,000 areas outlined above. So with all of that sophisticated competition, how can a new investor find their footing? The good news that is institutions miss deals all the time. 

Our suggestion? Pick up what they’re missing to get your allotment of homes over the next 3-5 years.

Narrow In On the Basics

There’s plenty of opportunity for investors. Pick a couple of ZIP codes and get to know them really well. 

Real estate, at the end of the day, is a relationship game. It’s extremely difficult to achieve that at scale, which gives the smaller professional investor trying to build that 20-50 house portfolio an edge. Utilize local knowledge. Secure the right partners, who can land you deals and execute quickly. Build your team from agent to wholesaler using off-market channels. 

Very local and competent boots on the ground will be able to find the deals that naturally slip through the institution’s grasp. They can’t buy everything. 

2022 Trends

We’ve mentioned some incredible innovations in the space but, with all the money in the industry, expect to see even more innovation. More lenders will come out, making it a fairly competitive market. 

Interest rates are most likely going to increase this year. 

They won’t climb too much but expect to see an extra quarter-point for your thirty-year mortgage. Historically, though, interest is still really low. So even with slightly higher interest rates, it is still a great time to enter the market. 

There’s inflation at around 6%, so it’s important to get your debt lined up to hedge against it. 

Set your targets and break them down by quarter, outlining what you want to have done. Have a good pulse on the market rent growth on migration to possibly go above market to close deals if it will be a good long-term hold.     

Difference Between Now and the 2008 Recession

With all this institutional money flowing into the SFR space, one can understand a certain amount of concern and hesitancy, especially by those who lost BIG during the recession. But if you look closely, you can see the stark differences between 2008 and 2022. 

In 2008, people were getting loans and buying houses that they couldn’t afford. 

In 2022, you have institutions that are very sophisticated and are buying houses that they can afford. This money is not dumb. They have the ability and cash flow to fix something when it breaks. It’s vastly different than it was before, with different driving factors. 

Keep in mind, the actual demand for rental houses is going up. That 30-39 age group is going to increase by 5%, so people are going to want to live in rental houses. 

Pro Tip? Investors that pick the right neighborhoods and spend money on the right renovations will be able to capitalize on this market.  

Get Started Buying SFRs Today with Evernest

It’s a great time to buy and a great time to get started. Single-family rentals are a good risk-adjusted return. They’re a hedged bond with an equity kicker. Not to mention, there are some serious tax benefits that come with parking your money in this space. 

If you’re ready to buy your next (or first) SFR, here are 3 steps to get started today:

  1. Check out our podcast: The Evernest Real Estate Investor Podcast—for all things real estate investing, being a landlord, growing your portfolio, and more. 
  2. Find a property: Make sure you sign up for our Pocket Listings to get notified of all the deals that come across our desk daily. 
  3. Get an investor-friendly agent: We can help with that—we would love to help you buy your next rental property investment.

 


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