Single family detached homes are a familiar sight in many suburban neighborhoods across the United States. In fact, it’s the most popular form of housing in America, making up about 62% of the country’s housing stock.
This type of housing is even more dominant in places like Alabama. Even in largely urban Jefferson County, over 69% of the roughly 308,000 housing units in the area are single-family homes. Of those, about 18% are renter-occupied, making single-family rentals (SFRs) a significant segment of the housing market.
However, this is likely just the start. Alabama has seen a large population influx of Millenials and other young Americans in recent years—a demographic that overwhelmingly tends to rent. So, if you’re a buy-side institutional investor, it may be worth taking a closer look at Alabamian SFRs.
Why should institutional investors buy single family housing?
As an institutional investor, you can choose from a near-endless variety of traditional and alternative assets. So what’s the deal with SFRs, and why bother with them at all?
For starters, SFRs are larger than apartment units. The median square footage of a single family home built in 2020 was 2,261 square feet, while the median size of multifamily units built for rent in 2020 was just 1,075 square feet.
For this reason, SFRs may be more desirable to certain demographics, such as larger families with kids. Put another way, diversifying into SFRs can help you capture tenants that may not otherwise appear in multifamily portfolios—helping you broaden your tenant pool and de-risk your real estate portfolio.
Single family isn’t just for solo landlords anymore
While the advantages of SFRs have long been known to mom-and-pop landlords, institutions have been reluctant to take part—until now.
For example, in the fourth quarter of 2021, SFRs became a top pick among corporations and investors. Nationally, 18.4% of single family homes were snatched up by investors, including institutional asset managers like Blackrock and Blackstone—a record high since 2000. In some locales, this number was far higher. In cities like Charlotte or Atlanta, corporations purchased over one-third of single family homes in the area. Interestingly, more than 98% of SFRs bought by institutions sold for less than $300,000, suggesting that companies have a penchant for the lower-end of the rental market.
Suffice to say, this may make places like Birrmingham, Alabama—which sports a median home price of just $103,000—an potentially attractive place for institutional investors to establish a SFR portfolio.
Single family rentals are a fundamentally attractive asset
But the boom in institutional interest in SFR investment is far more than just a function of price. Rather, SFRs boast intrinsic advantages that can make them attractive additions to any institutional portfolio. Highlights include:
- Tenant longevity: A single family tenant typically renews their leasing contract 75–80% of the time. This low turnover rate means that the average tenant will stay in a home for about three years—factors that help reduce rental downtime and maximize income.
- Broad tenant base: SFRs attract a wide field of potential tenants, including families, young professionals, and college students. With occupancy rates at over 95%, SFRs in high-demand areas—like Huntsville, Alabama, whose population ballooned by 17.8% in the last decade—may be an especially good bet.
- Lower risk: On the whole, real estate may be more attractive than public equities, at least from a risk-adjusted standpoint. Real property is generally less volatile and generates more consistent cash flow. Additionally, the availability of non-recourse debt may also allow you to more easily pursue leveraging opportunities that can juice cash-on-cash returns.
- Higher liquidity: Because of their low purchase price and larger qualified buyer pool SFRs are typically more liquid than multifamily properties, making them easier to sell and convert into cash.
- Eligible for FHA financing: To qualify for FHA 203(b) loans—which allow you to acquire properties while putting as little as 3.5% down—properties may contain up to 4 units. For this reason, SFRs are prime candidates for FHA financing—which, if used strategically, may help you magnify your returns. In a similar vein, FHA loans can help lower the amount of cash you need on hand to make an SFR acquisition—reducing barriers to entry and freeing up capital for other opportunities.
Should financial advisors recommend single family real estate investments?
Buy-side institutional investors aren’t the only ones who can take advantage of single family rental properties. Clients of Registered Investment Advisors (RIAs) may also find SFRs to be attractive.
Of course, these retail investors’ profiles and priorities will likely differ from that of institutional buyers. For starters, individual buyers almost certainly command less firepower than institutions, meaning they may find SFRs to be more suitable than heftier, more expensive properties. Individual investors may also be more concerned with cash flow, given that certain small-scale landlords may rely on their rentals as a primary source of income.
All this is to say that if you’re a financial advisor, it may be worth examining if your clients’ portfolios can benefit from SFRs. While this kind of real estate investment may not be right for every investor and should be carefully considered on a case-by-case basis, there are several factors that can make them a good fit. Upsides to SFRs include:
- All-cash purchases: Because SFRs typically cost less than multifamily or commercial real estate investments, investors—even those with smaller capital bases—may be able to afford to make all-cash purchases. This means investors can avoid hefty mortgage interest payments and bypass the hassles of qualifying for financing.
- Tax-advantaged investing: You can establish self-directed Individual Retirement Accounts (IRAs) for your clients that arm them with checkbook control of their retirement assets—enabling them to allocate and invest their nest eggs however they want. They can invest in SFRs, buy businesses, fund their own startup, and get access to a whole host of alternative investments. If your clients choose to invest in real estate, any rental or capital gain income may be tax-deferred or tax-exempt.
- Convert equity into cash: If your clients own SFRs and need liquidity, they can establish home equity-backed loans and lines of credit. Borrowing against a real estate portfolio can be cheaper than personal loans—and can help your clients get the cash they need, when they need it.
Partnering with a turnkey provider
Being a landlord is a labor and time-intensive process. Whether you’re venturing into SFRs as an institutional investor or an individual investor, you likely lack the bandwidth to attend to the day-to-day activities necessary in operating and maintaining a successful rental portfolio.
That’s where we come in. Full-service turnkey providers like Spartan Invest help you acquire, rehab, renovate, rent out, manage, and maintain a property. In other words, it’s all the benefits of real estate ownership and without any of the hard work.
Particular upsides of working a turnkey provider include:
- No sweat equity: Turnkey providers create a more passive, hands-off experience. You don’t need to be present at the site to oversee the construction, maintenance, repair, or renovation of the asset—nor will you have to source, vet, and hire contractors to do the job for you. As a result, you’ll have ample time to focus on other matters that require your attention—like other assets in your portfolio, for example.
- Tenant placement: You won’t have to scout around looking for a tenant. Turnkey providers will handle everything from advertising and tenant recruitment to screening and contract signing. When it comes time for a tenant to renew or terminate their lease, your provider will once again step in to help you retain your current tenant or find a new one—taking careful steps to reduce rental downtime in the process.
- Property management and maintenance: Real estate isn’t a passive activity—unless, of course, you work with a turnkey provider! Windows break, faucets leak, and light bulbs blow out. Tenants also have questions, comments, and concerns—and will need a point of contact during the duration of their lease. Turnkey providers will handle all of these issues for you—so you won’t have to interact with your tenants at all.
In short, turnkey providers go a long way in simplifying the investment process for institutional investors—and working with a provider (like ourselves!) when purchasing a single family rental property may turn out to be two of your best ideas yet.