‘Robust’ Tenant Demand for Single-Family Rentals

Demand for single-family rental properties remains strong, with rent increases in securitized properties approaching 6 percent, reported Morningstar, Chicago. 

Morningstar said rents rose for most properties in 23 single-borrower, single-family rental securitizations over the past 18 months.

“These rent boosts outpaced the year-over-year increases of three- and four-bedroom RentRange LLC median rents for properties in similar metros,” Morningstar’s Increasing Rents on Single-Family Properties Suggest Robust Tenant Demand report said. “While deals backed by single-family rental properties have existed for less than three years, their performance has met our expectations,” Morningstar said.

Single-family rental investment firm HomeUnion, Irvine, Calif., reported that Cleveland SFR properties had the best returns in the country as of mid-year, while San Francisco properties–with higher acquisition costs–yielded the lowest returns. HomeUnion analyzed first-year cap rates–the relationship between an investment property’s net operating income and its market value–in each market.

“Through mid-year, owners of SFR investment properties benefited from healthy returns in many markets nationwide, but especially in markets located in the Midwest and Southeast,” said HomeUnion Director of Research Services Steve Hovland. 

Hovland said SFR outperform many other investment vehicles including bonds and gold. “As interest rates remain low after the June Brexit vote placed downward pressure on U.S. treasuries, bonds and other investments will continue to be low-yielding assets,” he said. “Investment real estate has proven to be a successful part of a diversified portfolio, and these markets offer the largest returns.”

After Cleveland, other high-yielding SFR investment markets included Columbia, S.C. with a 9.7 percent cap rate and Birmingham, Ala. with an 8.5 percent cap rate, Hovland said.

Hovland noted that California is home to several low-yielding markets for SFR investment including San Francisco’s 2.5 percent cap rate, San Jose’s 2.6 percent, Orange County’s 2.7 percent and Los Angeles’ 3.1 percent cap rate. “These markets don’t offer such great returns,” he said. “If an investor’s horizon is long term, these coastal markets might be worth exploring, but the return on investment won’t be as immediate as it will be in the Heartland.”