Why Long-Term SFR Investors Face Less Risk

News of capital flooding into single-family rentals hits daily. Since the sector’s birth during the Great Recession, when investors snatched up disparately located distressed homes in an opportunity play, much has changed. The initial investors, who aggregated portfolios with the intent to sell off assets once the homes appreciated, have become longer-term operators, cementing SFR as a continuing asset class.

Yet perhaps more notably, the Build-to-Rent SFR community model, initially considered a poor investment by institutional players, has become all the rage with funds and homebuilders jumping in to take advantage of the immediate opportunity.

The contiguous single-family rental home community is undoubtedly the most innovative living concept introduced in the past two decades. Obviously, the idea of renting a detached home is far from new. The living experience of fully amenitized, ground-up communities, however, is unique and special. While the Build-to-Rent SFR community is nothing more than a horizontal multifamily model, the marriage of the widget (i.e., the home) and the operation (i.e., of a rental community) is what makes it an innovative investment model. When it’s done well, with homes presented in a prime location within a community both enviably amenitized and superbly managed/maintained on-site, it represents a prime investment whose asset value is almost certified over the long term. That said, there are some concerns about what is happening in the sector, and the greater economy, today.

SFR is now a hyper-mature industry and there is risk. We are late in the current cycle, and with so much money chasing opportunity, SFR has become a financial alchemy game for some. Many are banking on unrealistic rent increases in a market with severe upward pressure on cap rates and costs. One exception remains with participants who can control their cost basis by building ground-up homes on their own and avoid paying the many compounding fees or profits to others, as entitling land, developing lots and building houses can significantly bloat one’s costs.

On a macro-economic level, there are additional concerns including geopolitical and socioeconomic issues, rapidly rising inflation, supply chain disruptions and employment concerns. We are also at the 12- or 13- year post-recession recovery marker. All these factors combined should have many unnerved about where things are heading.

The Long Game

Perhaps those who should be most concerned are investors engaged in short-term strategies. These players may apply cost efficiencies to make their business plans work. This doesn’t make them nefarious, it’s just real estate 101. By the end of next year, however, some could be in trouble as they are arguably faced with the most risk right now.

Conversely, SFR participants with longer-term investment strategies expect ups, downs and challenges over time. With a 10- or 20-year investment horizon, they are also typically willing to spend a bit more money to deliver a higher quality asset in a better location, because they will be a longer-term owner and operator of said asset. They account for inevitable bumps in the sector—such as stagnating or decreasing rents or other issues—and can more easily manage risk compared to those seeking a more immediate ROI.

Much of this discussion may paint the picture of a storm cloud hanging over the SFR arena. On the contrary, there is still reason to feel bullish about the asset class overall. It’s a great business, and long-term fundamentals are still strong. People need housing, and demand for rentals does not appear to be waning, especially for communities that provide more bang for the buck with on-site service and amenities. The SFR business done well, with long-term capital backing the build and operation of ideally located, amenitized and managed communities, sits on par with class A multifamily. This SFR model is here to stay.

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