Single family rentals are a “superstar” investment.

With mortgage rates hitting 8%, inflation still running hot and housing supply tight, you might think this is one of the worst times to be looking at real estate as a pure investment. Not like that. In fact, some strategists say, in an era of weak stock and bond returns, investing in one corner of the real estate market can make a lot of sense for an investor with liquid cash to put to work.

“From the ashes of rapid and somewhat unpredictable change, a phoenix (pun definitely intended) has risen again and again: single-family rentals (SFRs),” Moody’s Analytics senior economist Ermengard Jabir wrote in a recently published analysis.

In the immediate aftermath of the Great Financial Crisis, there was a big shift, or the beginning of what became a shift, in single-family rental ownership, Jabir said Wealth. What was almost exclusively mom and dad shifted when institutional investors entered the market, in fact because of how many single-family homes were foreclosed on. Institutional investors benefited, of course, but they also essentially kept the market from bottoming out.

And now, despite the pullback we’re seeing in the multifamily rental market, in terms of rent growth, the single-family rental market is doing very well — demonstrating stabilization and marginally positive growth, Jabir said. Housing is severely underdeveloped across the country, and while this has unfortunately led to housing crises across the country, it has increased the value of single-family homes. Consider the millennials: Older generations were crushed in 2008, and younger ones are crushed now after record home appreciation, which has proved beneficial to the single-family rental market as they have been largely displaced from home ownership. the dwellings.

“All of these headwinds for the single-family purchase market are turning out to be huge tailwinds for the single-family rental market,” Jabir said. Basically, home prices, which have risen more than 40% nationally during the pandemic, and mortgage rates, which have reached 8% after hovering around 3% for a while, are driving people to rent instead of buy . The reason that seems to favor the single-family rental market more than multi-family is the substitution effect. Some want to live in a house and want a house with a backyard or one that is in a good school district because they have kids. If it weren’t for the historic deterioration in affordability, they probably would be able to. “They want the traditional American dream, they may not be able to afford it, but they can afford it by renting a single-family home,” Jabir said. Simply put, it’s good for investors. Nationally, gross rental income for single-family homes is higher than the capitalization levels of multi-family homes, according to data from Moody’s Analytics and Parcl Labs. “What that tells us is that there is still tremendous value in the single-family rental market that has yet to be captured by investors,” Jabir said.

The single-family rental market, she continued, is “the superstar of today and tomorrow” because it’s here to stay and positioned for long-term growth — to the extent that builders are shifting resources away from single-family construction and into the buying market. of single-family rentals. This will only tighten supply, which again benefits the single-family rental market.

Not unlike most real estate sectors, there are variations in the performance of single-family rentals in different markets. Among metropolitan areas with a population of one million or more, Rochester, New York, leads the pack of the top 10 single-family rental markets as measured by gross income according to Moody’s Analytics and Parcl Labs. The gross yield for single-family rentals in Rochester is 11.7%, with a rent-to-list ratio of 0.19. Below you’ll find the top 10 single-family rental markets by gross yield and their respective rent-to-list ratios (the number of properties available for rent compared to the number of properties available for sale; when are high, gross incomes tend to be lower).

See the ranking of the 10 most profitable single-family rental markets

Of these top 10 markets, there are only three with a large institutional presence. “It is very interesting that where there is investment opportunity, in terms of high gross income, there is almost no institutional presence,” Jabir said. Also, some of these markets aren’t necessarily areas that have seen huge home price appreciation. But there is still a need for housing where the population may not be ready to afford to buy, so that translates into higher rents. Still, it’s interesting that these metros, which are generally considered affordable from a buying standpoint, are seeing increased rents after huge rent growth over the past few years, which has since leveled off. Something else to note: These metros, with the exception of Houston, which is slightly different, have relatively low rent-to-list ratios, so where the number of properties available for rent is small compared to the number of properties available for sale, you are in a better position. “These are definitely the areas to consider” as an investor looking to enter the single-family rental market or even expand their existing portfolio, Jabir said.

“There’s still a lot of value right now, especially in markets where institutional players haven’t made their mark yet,” Jabir said, adding later, “You can still buy single-family rentals at prices that bring attractive returns.”

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