What is SFR in real estate investing?

family-outside-single-family-rental-home

Investing in single-family rentals, or SFR real estate, has long been a popular alternative to public markets. As SFR returns are typically not correlated to the stock market, they can be attractive to a wide range of investors looking to reduce their public market exposure. 

Single-family homes are the most common form of housing in the United States. Of the approximately 140 million housing units in the United States,  approximately 90 million are single-family homes. There are over 15.8 million SFR units, making up about a third of the United States rental stock and about 11% of the US housing stock. 

Here we take a closer look at single-family rentals and how they fit into the broader landscape of real estate investing.

What is SFR in real estate?

Single-family rentals, or SFRs for short, are single-family homes that are rented out to tenants. Prospective renters are attracted to single-family homes because they are generally larger than multi-family units, located in more suburban areas, have access to outdoor space and overall represent much of what a family with kids may look for. 

From the homeownership peak in 2004 to 2018, the number of married couples with children that owned homes fell by 2.7 million, while the number renting rose by 680,000. These changes mean that the number of married couples with children that owned homes fell by 2.7 million, while the number renting rose by 680,000

What is the strategy for investing in SFR real estate?

Investing in SFR real estate is popular among both retail and institutional investors. In general, these properties make money from their net operating income, which is the rent minus the operating expenses. 

The idea is to buy a home, rent it out, collect income, and then sell the property later down the line. SFR investments allow buyers to benefit from potential rent growth and house price appreciation, which in turn are dependent on factors such as location, unit type, unit condition, amenities, price point, and market dynamics. Controlling for operating expenses such as management costs, repair costs, and maintenance costs is also a critical component of the investment. 

This strategy gives retail investors the ability to leverage their local knowledge and presence for operational management. Its popularity amongst retail investors has led to the market being very fragmented. It is dominated by ‘mom and pop’ investors who own between 1-10 properties and account for an estimated 88% of SFR unit ownership.

Since the Great Recession, there has been an uptick in institutional interest in the asset class. While the asset class is still dominated by smaller investors, institutional players with over 2,000 homes each are estimated to own approximately 1% of SFR units.

Professional management companies and technological advancement have made it possible to operate larger scale portfolios of SFRs economically

suburban-neighborhoor-single-family-rental

How has SFR been impacted by the COVID-19 pandemic?

SFR is one of the few asset classes that has actually seen a growth in demand since the start of the pandemic. Demand for single-family portfolios, defined as five or more homes, has skyrocketed in April 2020 by 650%

There are many reasons for this marked increase in demand:

  1. SFR properties provide renters with the benefits of having distance between neighbors and a yard for private outdoor access, which are valuable features for social distancing efforts. 
  2. In May, the U.S. economy’s unemployment rate was 13.3%. Demand for rentals will only increase as job loss, car loans and student debt will cause families to consider or require more affordable housing
  3. As some households seek lower density neighborhoods and single-family residences from the perspective of renting, the SFR market will likely expand in the quarters ahead.
  4. Working from home has become more prevalent and homeownership for single families is further away, making SFRs more attractive to renters. 
  5. SFRs tend to house either families or groups of adults who might be roommates. This increases the likelihood that SFRs house more than one working adult and as a result, there is a greater chance that rent gets paid in hard times.
  6. The pandemic has accelerated the move from apartments to SFRs, especially for older millennials with families. 

What makes single-family rental real estate a potentially attractive investment?

Even before the start of the COVID-19 pandemic at the start of 2020, certain economic and demographic factors came together to make single-family rentals a potentially attractive asset class. Here are some of the important trends we observed: 

Preference for renting over buying 

Millennials and boomers have shown an increased preference for renting. In fact, in the first three quarters of 2019, rentership rates increased by 4.5 percentage points among households aged 35–44 and 5.3 percentage points among households aged 45–54. Notably, even among households aged 55–64, the renter share increased 4.2 percentage points over this period

Among the millennial age group, which is the largest living age group in the United States, there has been a trend towards later homeownership and an increased propensity to rent. Renting allows people to be ‘asset-light’ and, therefore, have a more mobile lifestyle that allows for travel and employment mobility.  

Homeownership has become increasingly unaffordable

Interestingly, public opinion surveys indicate that most renters are satisfied with their current housing situations, but still desire to eventually own homes. This is an indication of how deeply ingrained the notion of owning your own home is in the American psyche. 

With home prices rising faster than wages in roughly 80% of U.S. markets, many people are renting out of necessity. Increases in home prices, more restricted access to credit, and high levels of student loan debt have made homeownership unaffordable to many. The inability of being able to afford homes has become a bigger issue in larger metropolitan areas where there is a higher concentration of employment opportunities. In these areas, land constraints and lagging construction activity has generally led to significant increases in home prices. These trends have made it difficult for many to consider homeownership until later on in their careers, hence the increase in the demand for rentals.

house-with-a-garage-single-family-rental

Rents for SFR real estate have been increasing over time

The consistent pace of single-family rental growth is noteworthy given the large fluctuations in the single-family rental stock over a period of five years from the third quarter of 2014 to the third quarter of 2019. Rents for single-family homes have been climbing consistently. There has been a 3% year-over-year increase in the rent charged for SFRs

A lack of moderately priced rentals, but high demand

The supply of rental properties has risen alongside demand, but new residential construction activity has lagged. Furthermore, the construction activity that has occurred has been largely focused on higher-priced rentals, resulting in a shortage of moderately priced rentals. Renters today have higher incomes and are more likely to be families with children than in the past, implying increased demand for higher-end apartments as well as for single-family homes. 

A key strength of an SFR strategy is the flexibility offered by these income-generating assets. Unlike a multi-family property, a portfolio of SFRs can be sold in whole or in parts. The sales themselves can either be to an individual homeowner or to another investor. This means the specific sales strategy and timing for a portfolio can be adjusted in response to market dynamics.  

Overall, there is a growing need for moderately priced rentals in the United States that has been accelerated by the COVID-19 pandemic. Single-family rentals can help provide families with an affordable option to live in a single-family home in the suburbs surrounding high employment metro areas while following social distancing guidelines. 

This communication and the information contained in this article are provided for general informational purposes only and should neither be construed nor intended to be a recommendation to purchase, sell or hold any security or otherwise to be investment, tax, financial, accounting, legal, regulatory or compliance advice. Any link to a third-party website (or article contained therein) is not an endorsement, authorization or representation of our affiliation with that third party (or article). We do not exercise control over third-party websites, and we are not responsible or liable for the accuracy, legality, appropriateness or any other aspect of such website (or article contained therein).
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