Morgan Stanley’s real estate analyst, Laurel Durkay, recently shared some good news on CNBC for property owners and a wake-up call for potential buyers. With a shortage of inventory, 2 million homes need to be built over the next decade to meet demand, which means the rental market is set to take off.
This opinion is echoed by many real estate experts. Realtor.com’s Sabrina Speianu noted, “While inventory this May is much improved compared to the previous three years, it is still down 34.2% compared to typical 2017 to 2019 levels.”
Forbes also chimed in with Keith Gumbinger from HSH.com saying, “We need to see home inventories increase significantly. This would ease the upward pressure on home prices.”
Low Inventory Keeps Renters Renting Limited inventory, especially outside Sunbelt markets, has kept rents high and slowed inflation’s decline. High interest rates have made buying homes even more unaffordable. AMH Homes reports that buying a home is 25% more expensive than renting in its markets, pushing more people toward renting.
Yardi Matrix’s data shows rents are still rising. The Northeast and Midwest saw significant increases, with New York City leading at a 4.8% year-over-year increase and Columbus, Ohio, at 3.6%.
Single-Family Homes Are a Hot Investment Morgan Stanley highlights single-family homes as the most lucrative asset class, with a boom in build-to-rent developments. In 2023, builders completed 97,000 build-to-rent homes, a 45% increase from the previous year. This gives tenants the feel of living in a single-family home community while they save to buy their own homes.
High rates have caused delays in large multifamily projects. For example, a 104-unit development in Boise, Idaho, has been paused, and about 2,000 units in Worcester, Massachusetts, are delayed.
CoreLogic found that New York had the highest year-over-year increase in single-family rents in February 2024 at 6.9%, followed by Seattle at 6.8%, and Boston at 6.4%.
Realtor.com reports that home prices grew by 37.5% from May 2019 to May 2024. This demand is a golden opportunity for smaller investors to focus on building their single-family portfolios.
Tips to Build a Single-Family Rental Portfolio Here are some key moves real estate investors can make:
- Boost Your Credit Score: A high credit score is essential for loan approval.
- Buy a Rental First: Keeping a low debt-to-income ratio helps you buy more homes quickly.
- House Hack: Rent part of your home to save cash faster.
- Move Every Two Years: Avoid capital gains taxes and use profits as down payments for investments.
- BRRRR Method: Buy, rehab, rent, refinance, and repeat. Ensure your investment still cash flows after taking equity out.
- Liquidate Assets: Free up cash for investment by downsizing or selling stocks.
- Borrow From Friends and Family: A lower-cost alternative to hard money lenders.
- Take Out a HELOC: Use your home’s equity to start investing.
- Rent Out Your Home: Move into a rental and rent out your home to save and lower your debt-to-income ratio.
- Earn More and Minimize Expenses: Maximize your income and save for investments.
- Move Somewhere Cheaper: Reduce living expenses to save for your first investment.
- Find Seller-Financed Deals: Easier to qualify for than traditional loans and don’t show up on your credit report.
Wrap Up:
Single-family rentals are booming, with median rents for three-bedroom homes increasing more than home prices in 63% of markets analyzed by ATTOM Data. Buying a single-family home can be a springboard for further purchases and one of the easiest loans to qualify for. While not every deal will cash flow in the current market, appreciation is key. Once rates drop, you can refinance and enjoy the benefits.