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n the years since the end of the Great Recession,
economic growth and other fundamental factors
have broadened the flow of capital from a diversified class of professional investors. Across the
spectrum, from large institutions to small businesses, investors
have applied active management strategies to residential
real estate through SFR-portfolio purchases.
Investors have played a major role in shifting the supply of
single-family homes from the purchase market to the rental
market. From 2007 to 2016, the number of SFRs nationwide
grew by 31 percent, according to U.S. Census Bureau estimates.
In the wake of the Great Recession, large private investment
funds stepped in to absorb millions of foreclosed properties.
Their value plays gave birth to huge portfolios of rental
homes. As a result, single-family homes and townhomes
now comprise 35 percent of all U.S. rental properties.
Demographic and economic realities are driving a nationwide
shift from homebuying to renting and — more specifically
— a shift to single-family rentals. An increasing share of
consumers who once purchased homes as they entered the
workforce and raised families are being priced out of the
conventional residential home-purchase market.
With high levels of student debt, fewer millennials qualify
for home mortgages in today’s lending environment. And,
simultaneously, the parents of the millennial generation are
moving into rentals at higher rates as they plan for retirement.
From 2009 to 2015, for example, the
number of renters ages 55
and older grew by
nearly 30 percent, census
strengthen the case for
for SFR investments. Renters
generally have greater liquidity than
homeowners. Millennials who sign
leases are spending a higher portion of
income on rent than their older siblings.
This liquidity has helped support a steady
succession of rent increases for single-family homes. This past
February, for example, single-family rents rose year over year
by 2.1 percent and had experienced monthly increases of
2 percent or more since August 2017, according to real estate
services company Zillow.
Of course, rental income plays a major role in an investor’s
total return, and the long-term trends have been favorable.
With a steady source of income, investors can take full
advantage of market fluctuations, selling at premium prices
and buying discounted properties for greater future growth.
Although Wall Street started the trend toward institutionalization, value-creation opportunities remain robust for smaller
players in the SFR market, which has always been fragmented.
Some mortgage lenders will finance portfolios of as few
as five homes with investors and operators who are looking to grow. Other lenders concentrate on the small- and
middle-market institutional operators of 10 to 100 homes.
Despite the increased flow of new institutional capital,
publicly traded institutional portfolios represent just
1 percent of the nation’s rental-housing stock, according to
Green Street Advisors. That leaves plenty of room for
Most middle-market SFR investors adhere to two basic
strategies: buy and hold or fix and flip. In either case, the
range of investment outcomes can vary substantially, depending on costs and execution, as well as the accessibility
and flexibility of financing.
Unfortunately, flexible sources of SFR funding are not
widely available to middle-market borrowers. Traditional
commercial lenders are squeezed by post-financial-crisis
regulations and capital requirements. Lending limits and
the volatility of securitization markets have constrained
funding, especially for smaller portfolios of properties.
Moreover, traditional lenders have been slow to adapt
standards and practices that adequately support medium-sized SFR investors.
Many lenders fail to fully underwrite and price their loans
for long-term growth opportunities, even for borrowers
with proven track records in operations and management.
As a result, SFR portfolios are often built with a jerry-rigged
collection of overlapping recourse credit lines from multiple
lenders with vastly inconsistent terms. This creates costly
and time-consuming inefficiencies for the borrower.
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80 Scotsman Guide Commercial Edition | ScotsmanGuide.com | August 2018
“The capital constraints of owner-occupied
home purchases strengthen the case
for SFR investments.”