Millennials might be different from the Gen X and Baby Boom generations when it comes to technology, but a 2019 study shows that they have very similar views on the value of real estate as an investment. The difference is that many millennials have not been able to afford to buy property.
There are new options available for those who want to explore single-family rental real estate. One of the hottest types of real estate during the pandemic has been single-family rentals (SFRs). SFRs are able to cater to a growing market of people who want space but don’t want the commitment of owning a home. According to data from the PropTech company Roofstock, 40 percent of tenants occupying SFR homes are under 35 years old.
Investing in SFRs allows people to choose markets that are poised to grow, instead of just the markets that investors happen to live in or near. Many SFR investors invest outside the metro area in which they currently reside. This does pose an important challenge, though. It is up to would-be SFR owners to analyze opportunities for these investments.
Factors to consider for SFR investment success
In a perfect scenario, investors could jump into opportunities once they narrow down their preferred geography. But, as with anything with potentially high reward, it’s a complex journey requiring careful consideration.
One challenge: ongoing supply chain issues and labor shortages. “The market is really good, but there’s not enough inventory,” says Darel Daik, CEO of Noble Mortgage & Investments in Texas “We’re dealing with less than two months [of inventory] in Houston and less than one month in Dallas. A lot of investors have turned to new construction to compete with that.”
However, if SFR inventory is low in an area, leaning on new construction is not a guaranteed fix because the overall housing market is already behind on demand. Plus, some construction companies are holding off on new construction until supply chain issues and delivery conditions of raw materials improve.
Remember to question stereotypes about who wants to live in SFRs and use that information to choose where to invest. Not all Gen Z or SFR renters want to live in an urban area. As work becomes more flexible and positions become remote, the need to be close to an office becomes less relevant. According to a report from Arbor, 43 percent of Gen Zers want to rent a single-family home after they graduate from university. Additionally, 53 percent of SFR renters want yards for pets or children.
Where to invest in SFR
There is plenty of data that can influence an investor. Understand the source of data and keep in mind that not all data is created equal. “Interested SFR investors should look at the supply and demand characteristics of the market. Pay attention to areas where there’s job creation and inbound migration of creative and tech types. Look at the total number of available rentals and how long they’ve been on the market, too,” said Suresh Srinivasan, chief marketing officer of Roofstock, which operates an online real estate investment marketplace. “Make sure you’re doing your homework as no one fact can ensure it’ll be a home run.” With that in mind, some places stand out for investors.
Everything might just be bigger in Texas, and SFR opportunities seem to be falling right in line. Why Texas? “Firstly, Texas is known for its hospitality and friendly people,” explained Wan Bridge President and CEO Ting Qiao “Secondly, Texas was, and still is, experiencing high population growth and high employment growth and is also home to many Fortune 500 companies.” Despite this growth, property prices in the state are still affordable compared to many other states.”
BALTIMORE AND PHILADELPHIA
These two northeastern cities provide access to work opportunities and diverse economies. Baltimore is just 40 miles from Washington, D.C., and multitudes of federal jobs. Known as the “City of Neighborhoods,” Baltimore has an energized home market where listed homes are often sold in three days and Roofstock forecasts they’ll grow over 11 percent over the next year.
Philadelphia hosts a diverse economy with many jobs in various sectors. As of today, 45 percent of the total occupied housing units are rented and rent is affordable in comparison to other cities. However, rent in the city has increased almost 9 percent above the national average, making it attractive to investors.
Tampa, Jacksonville, Raleigh, San Antonio, Charlotte, Nashville, Atlanta, Phoenix, Orlando, and Austin all made Zillow’s top housing markets of 2022. “Homebuyers are attracted to markets in the Sun Belt that offer relative affordability, fast-growing economies and weather that allows them to enjoy the outdoors year-round,” says Zillow economist Alexandra Lee. Since work can be done more remotely than in previous years, many workers are able to live where they choose. Being able to live somewhere for a year via a “working vacation” also increases the appeal of SFR for renters.
Millennials interested in the SFR market have an attractive opportunity. The popularity of SFRs was accelerated by the pandemic, but may be a trend with staying power. Taking the time to research where to invest can pay dividends. Not all places are equally appealing, and not all renters want the same thing. However, understanding the market can benefit current and future investors.