The popularity of the single-family rental (SFR) market has boomed in the last two to three years, particularly among institutional investors. Last year saw the announcement of two major SFR mergers (Starwood Waypoint Residential Homes with Colony American Homes, which was completed in January 2016, and American Homes 4 Rent with American Residential Properties, which was completed in March 2016). MReport recently spoke with Gary Beasley, CEO of co-founder of Roofstock Investing, about how the SFR landscape has changed—and what lies ahead for the industry.
At what point did you realize that the single-family rental market was a viable asset class and one that is worth investing in?
I started looking at the space back in 2009 with my partners from Waypoint Homes and it became apparent at that time to me that the asset class was viable. The reality is that it's been a viable asset class for generations. It's just only recently that it's caught the attention of institutional investors. We started looking at it back in 2009 after the crisis, then it turned out that was an excellent entry point and it allowed us to really learn the business and put a significant amount of capital to work over the next several years in the space and really getting comfortable with the operating characteristics of the asset class. Back then it was clear to us that it was a good trade that we could invest capital in a low-cost basis and even if the operations weren't that successful, that the capital appreciation would be there over time. What we did come to learn was that the operating characteristics of this asset class are actually quite attractive and you can earn a nice current return along the way while you're also benefiting from home price appreciation. I realized in '09 that it was a good investment, but then in 2011, my intuition was institutional capital was likely to flow in in a big way, and that's when we raised $200 million from GI Partners, a private equity firm, and started buying homes aggressively in early 2012. Soon after, a lot of the other large players like Blackstone and Colony Capital and other started buying homes pretty aggressively as well. So that was a real turning point in early 2012 for institutional capital.
There are a lot more SFR investors now than there were a few years ago. As more investors enter the market, how has that changed the SFR landscape, or does the strategy remain the same no matter how many investors are in the space?
If you look back over the last couple of decades, it's always been a pretty significant portion of the housing stock. Roughly a third of the households in America rent, and roughly a third of those households are renting single-family homes. Somewhere around 10 or 12 percent of the housing stock has been rental homes for a long time. It's moved a couple of percentage points through the crisis, with homeownership going from 69 percent down to 64 or 63 percent, and each percentage point represents about a million households. So in terms of the number of investors, I would say clearly there have been more institutional investors entering the space in the last several years, but there's always been about four to four and a half million individual investors in the asset class. What's happening is you're getting more visibility into how the asset class works, more transparency in the operations with the onset of public companies in the space, be it equity or in debt, so it's creating more visibility into the economics of the business. I think if you look back, it's always been a good business for mom and pop investors—a great way to build equity and generate cash flow. It's just that now there are many more institutions who look at this asset class and see it as a very attractive risk-reward tradeoff in today's environment.
Where do you see the SFR market in five years? How do you think it will be different from the way it is today, or will it be different at all?
I think you're going to continue to see more and more institutional interest in the asset class. You'll see a small number of large public REITs. There are currently a handful of public REITs. I used to run one of them. The reason for that is severalfold: The size of the market for one is the same size, if not a bit larger, than the institutional multi-family market. The economics of the business are quite good. So the returns that can be generated from current yields and appreciation are excellent. The institutional operators are getting better and better at the operating piece of the equation. So when you put all that together, I think it's a recipe for continued institutional investment in the asset class. It's a little bit like toothpaste. Once the toothpaste comes out of the tube, it doesn't go back in. That's the case with institutional capital here, whether it's public REITs, or private funds, or international investors who look at U.S. housing as an attractive asset class. I think you'll continue to see more and more institutional ownership.
That being said, I think you'll see steady and probably increased individual interest in the space as well, because as you look at the ability to build wealth and generate income in owning single-family rental homes, it compares quite favorably with other asset classes like the stock market or other forms of real estate where the cap rates are much lower.