Checking the Forecast for SFR

This feature originally appeared in the March issue of MReport.

Rental demand continues to grow in 2020, giving real estate investors an immediate opportunity to make money in the coming year. According to the Urban Institute’s Housing Finance Policy Center, single-family homes for rent are the fast-growing segment of the U.S. housing market with an estimated 3.4 million millennials preferring to rent rather than buy a home. 

However, due to tight rental inventory, the biggest challenge that investors will face in the coming year is finding solid opportunities in some of the most desirable markets. In order for investors to be successful in 2020, it’s important to pay attention to emerging trends in the SFR space. 

 

Markets to Watch 

Lucrative deals will continue to be available to real estate investors across the United States, but watch out for dwindling inventory and lack of affordability in certain markets. Forward Thinking investors need to know where to look to track down opportunities and overcome potential challenges. 

Also, it doesn’t hurt to stay on top of rising trends even for investors who already have specific markets they prefer to invest in, just in case they decide to branch out. According to the Urban Land Institute and PricewaterhouseCoopers “Emerging Trends in Real Estate 2020” report, the top five highest-ranked markets for investment and development opportunities in the coming year are Austin; Raleigh-Durham, North Carolina; Nashville, Tennessee; Charlotte, North Carolina; and Boston. 

These markets ranked high because they provide abundant employment opportunities and good quality of life. Surrounding opportunities and activities within or around these top markets also have the possibility of making the area more enticing to potential renters. Austin is one of the top five because it is slated to have the highest population growth over the next five years. The city has major expansions underway, such as Apple’s $1 billion investment in a North Austin Campus, the recent opening of Dell Medical School, and the expansion of the Austin-Bergstrom International Airport (ABIA). Charlotte, North Carolina, has quite rapidly become a destination that individuals are flocking to. With a history in the banking industry, this location is also beginning to attract technology and manufacturing firms, allowing for diversity in the workforce. 

On top of its airport expansion, Charlotte has also focused on light-rail growth and continues to look forward to more transportation projects. Also in North Carolina, Raleigh is rapidly expanding and is shaping up to be a technology magnet in the tech industry. It continues to grow its stock of large multifamily and office spaces for the influx of new residents. Boston is unofficially considered to be the Capital of New England due to the major role it plays within the entire region regarding economic performance and real estate vitality. From education and culture to the rich history and diverse neighborhoods, this city offers endless possibilities and opportunities. This hub has not only become a top attraction with its powerful educational institutions but also with its opportunities in the technology and medical industries. Each of these destinations offers countless activities, events, and opportunities. The biggest issue with these markets is that the cost of homeownership is still a challenge, making them attractive to renters. This can be seen as a boon to investors who want to hold rental properties in these rapidly expanding locations.  

REALTOR Magazine further delved into this topic and flagged additional markets as “Ripe for Discovery” based on the fact that they had populations exceeding 1 million and displayed double-digit growth rates. Additionally, these locations are included in this category because respondents are rather favorable of the area and their surroundings. However, real estate investors do not find enough consistency within the markets, which leads to a hesitation in investment. Markets to watch include Jacksonville, Florida; Salt Lake City; Columbus, Ohio; Cincinnati; and Louisville, Kentucky. Jacksonville, Florida, has quickly become a destination that people are keeping an eye on. 

This location is favorable to those who are looking for a high quality of life in the suburbs with easy access to the bigger city. Jacksonville ranks among the top 20 when it comes to the potential for home development, and it is also an area to look out for regarding potential retail and industrial property markets. 

Greenville, South Carolina, has taken the time to revamp its downtown area by incorporating new office spaces, craft breweries, restaurants, and condominiums. With the addition of numerous activities, this growth has attracted more groups to the area. As the destination becomes more populous, it will become a bigger target for real estate investors. 

Jersey City, New Jersey, is quickly becoming an attractive location for many on the East Coast. This spot is slowly becoming a “second city” for many people in the area. With the newly redesigned skyline located across the World Trade Center, the Port Authority TransHudson (PATH) rail line, and the New Jersey Light rail system, this destination plays a big role in the transportation industry. 

Over time, Jersey City has developed opportunities for nightlife on the riverfront and re-creation of the side to showcase the range of activities for its visitors' Amenities in the area play a crucial role in attracting renters and the investment opportunities in these areas allow investors to capitalize on the arrival of new residents. Finding areas where renting remains a more affordable option than buying should remain a focus for investors hoping to strengthen their portfolios. 

 

Build-to-rent

Once a small segment of the market, the build-to-rent niche is growing rapidly. A lack of housing inventory or the higher cost of homes in many markets is pushing investors to focus on new construction opportunities. 

However, unlike in the past, investors are building single-family homes solely for the purpose of renting them out rather than selling. Holding these properties as rental ensures a long-term revenue stream versus a slim profit margin the investor would see from the sale of the new construction home. Developers are turning their attention towards building large, professionally managed communities of detached single-family homes specifically as rentals. 

These communities offer the best of both worlds to tenants, offering shared amenities that renters often seek in an apartment building while providing the comfort and privacy of being in a single-family home. The expansion of the build-to-rent trend is just beginning and should be an area of the market that all real estate investors take into consideration. 

 

Short-Term Vacation Rentals

Short-term rentals, like those listed on Airbnb and Homestay, provide investors with the opportunity to diversify their portfolio and increase the amount of cash flow they collect every month. Unlike a fixed monthly paycheck from a long-term renter, short-term rental properties have the potential to double or triple that amount in a shorter period of time.

In 2020, vacation rental properties will continue to become another outlet for individuals, families, and groups to turn to when planning vacations. Since the beginning of Airbnb, the need for short-term vacation rentals has skyrocketed and will continue to do so because they offer travelers the ability of a unique stay and adds even more variety to their trip. Due to continued investment in vacation rentals and the “special touch” provided to guests, they have begun to overpower hotels. 

At the end of the day, it is crucial to recall that with increased cash flow also comes expenses. Real estate investors should carefully consider whether or not they can handle the cost, time, and effort that to have a profitable and successful short-term rental listing. Overall, short-term rental opportunities should continue to be a great area for investors. It is important to note that investors that decide to dive into the world of short term rentals need to be cognizant of existing or upcoming laws and regulations that could affect the future of these property types.  

 

What Does the Future Hold?

Demand for rentals across the U.S. doesn’t show any signs of slowing down. According to an article from Forbes.com, 35% of renters across the U.S. are in 

SFRS and an estimated 13 million new rental households that are expected to form by 2030. 

With no shortage of opportunity, an investor should take the time to determine which market and strategy best fit their business needs. It is also a good idea to find a reliable financing partner who has experience with rental properties and leverage their knowledge to increase a rental portfolio. 

A great financing partner can help an investor move quickly and provide a consistent flow of capital for future real estate investment deals. There will be significant opportunities for investors with single-family rentals for the foreseeable future, however, it is up to the investor to identify the emerging trends and up and coming markets to make the most of this ever-growing space.