From 2020 to mid-2022, homeowners weren’t the only ones cashing in on 3% mortgage rates. Single-family rental (SFR) operators and investors grew their portfolios thanks to the historically low rates and new demand for single-family rental homes.
SFR’s new game plan: 4 key moves
- MLS acquisitions: Virtually frozen.
- Slow growth strategy: A subtle shift toward build-to-rent (BTR) and direct purchases from builders instead of older home purchases.
- Portfolio changes: Some are becoming net sellers, monetizing non-core assets at higher prices due to tight supply.
- Operational focus: With acquisitions slowing, operations—especially cost controls—are in the spotlight.
MLS acquisitions take a time-out.
High borrowing rates have curbed investor home purchases. Institutions that own more than 1,000 homes have slowed buying activity across big markets over the last year.
Nationally, market share for large institutional operators (with 1,000+ homes) peaked in 2Q22 at 2.4% of US home purchases. Large SFR operators bought 0.4% of US homes in the second quarter of 2023, decelerating from the peaks seen in 2022 (see chart below).
- To help our research members better understand evolving investor activity, we provide investor market share by investor size and metro as well.
On offense: Building to rent; buying from builders
With ultralow resale inventory and the cost of capital climbing, SFR operators have been exploring other paths to growth. Some are focusing on developing and building their own homes to rent (BTR) or buying directly from builders if the price results in a 6.5%+ yield.
Our Consulting team continues to help clients across the country evaluate new BTR communities and SFR markets every day—both in markets you would expect and many smaller markets where there is less supply.
On defense: From buyer to sellers
With mortgage rates between 7% and 8%+, homeowners don’t want to sell and lose their low 3% rate. SFR operators are using this chance to sell some of their lower-yielding homes at high prices to homeowners who will pay more. They then move the proceeds into safer investments, such as US Treasuries.
Upping their operations game
SFR operators have dialed in on the operational part of the business. Operating expenses have taken center stage due to the higher property taxes and insurance expenses this year. Operators are also creating income by adding amenities and trimming repair and maintenance costs. Finally, operators’ locked-in focus on tenant retention continues to score high occupancy and steady rent growth.
Playing with momentum: SFR resilience persists.
Although SFR operators have made some big moves to adapt to rising interest rates, they still have the confidence of a team with momentum. Operators benefit from long-term fundamentals/tailwinds that include:
- A challenging for-sale affordability that is pushing demand to SFR. The monthly payment to purchase a single-family starter home exceeds the monthly SFR rent by $1,180 on a similar home, reaching new highs as mortgage rates exceed 7%+.
- High occupancy continues to prop up rent growth in most areas. Rent growth has moderated but remains healthy.
- Sunbelt/suburban migration moves demand to markets where SFR operators have large footprints and rents achieve a good yield.
- Work-from-home enables consumers to live farther from job centers.
Our Research team keeps clients in the game with timely insight into where the market is headed, guided by our housing and economic forecasts for the for-sale, for-rent, and building products markets.