Single-family residential real estate is proving to be one of the strongest performing asset classes in the US today. We have written extensively on the strong underlying fundamentals of the US residential market. Certainly, both buyers and sellers of homes in this market have experienced that strength. On the positive side, homeowners have seen a significant increase in home equity as prices for both new and used homes have risen over the last year or so. On the negative side, home buyers in this market continue to be frustrated by the heightened level of competition and homes selling for greater than the asking price.
However, this strength has not been limited to the market for home sellers and buyers. The strength in that market has carried over to single-family home rentals. As described in a recent Wall Street Journal article, “Single-family homes built to rent are emerging as the hottest corner of the U.S. property market, as investors respond to booming demand from home-seekers priced out of housing for sale. Rents on homes are rising faster than ever. New household formation is also increasing the demand for rentals, as more young people get their own places.”
The single-family residential market has experienced significant change over the past year. The COVID19 crisis prompted a surge in families vacating large, urban geographies and moving to suburban and rural locales. Much of this was aided and accelerated by the ability to enter remote work arrangements. This took place at the same time in which the trend toward millennials forming families and seeking single-family homes also increased.
These two forces, in combination with the historical low supply of housing, created a surge in home prices. A surge that forced many would-be homebuyers out of the purchase market and into the rental market. As described in the article, “historically high housing prices and steep down payment requirements for homes are driving more people to keep renting, even as rents rise, said Green Street analyst John Pawlowski. The cost of housing alternatives for single-family renters has exploded.”1
Both large Wall Street investment firms and national home construction firms are increasingly dedicating significant amounts of capital to the single-family rental market. These investors understand the strong underlying fundamentals of the market, and seek the stable, monthly investment income that comes with owning rental property. As explained in the article, “Traditional home builders like Lennar Corp. and D.R. Horton Inc. have made building rental houses a major component of their business. Giant investment firms are also piling up cash to add already-built rental houses to their portfolios.”1
As we have detailed in past posts, the market is currently experiencing a historically low inventory level of single-family homes to buy and rent. While housing construction companies are working to bring new supply online, it could take years to bring the supply/demand picture back into balance. The interesting aspect to this story is the scale of the construction of new single-family homes increasingly dedicated to the rental market. From the article, “Close to 100,000 built-to-rent homes will have started construction this year, according to estimates from Brad Hunter, founder of the Hunter Housing Economics consulting firm. Investors have poured about $30 billion in debt and equity into the sector in 2021, with many billions more in future commitments, Mr. Hunter said.”1
At Aloha Capital, we have been focused on the single-family purchase and rental markets for almost seven years now. As we have covered in past posts, there is ample evidence that this market could remain strong for years. Further, we view the entrance of institutional investors into this space as further validation of our lending business model and Fund’s investment strategy.
“Building and Renting Single-Family Homes Is Top-Performing Investment” by Will Parker, Wall Street Journal, 11.9.2021
Steve Sapourn is an active real estate investor, Aloha Capital’s co-founder, and portfolio manager. At Aloha, Steve has overseen more than 1300 real estate investor loans in 35 states. He has managed alternative investments in a variety of asset classes for over 25 years. He has deep experience in designing low-risk portfolios that reliably outperform benchmarks. Over his career, Steve has served as portfolio manager for a Fund of Funds, where he analyzed hundreds of alternative investment strategies. In addition, he has developed and implemented quantitative trading strategies in the futures, stock, and volatility markets. Steve’s long and diverse career benefits Aloha’s investors.