Does anyone else dislike the SFR Sector?
Hear me out...
I’m all for capitalism, but does anyone else take exception to the mass scaling of SFR as an investment class?
Homeownership is “the American dream.” Running SFR at larger scale in major metro areas will permanently put homeownership out of reach for millions of people. It will further indenture those who aspire to moving out to the suburbs to a life of renting, evictions, etc. There is already a home affordability crisis in most MSAs, even with record low interest rates.
It makes a ton of sense on paper, but the qualitative aspects make me sick.
If you think SFR is bad, you should check out manufactured housing...
I don’t see how they’re preventing people from owning homes. The markets with lots of institutional SFR properties aren’t facing housing crises like SF or NYC. Often times they’re building new homes, which is good for renters and buyers.
I’ve read about trailer park plays. I guess the main difference (sadly) is that your further screwing someone who was already screwed in the first place, and who can’t afford to move.
With SFR; the renter population generally has more upward mobility, economically speaking.
I'm not a fan either, but more for what it means with regards to demand for suburban sprawl which is devastating environmentally and aesthetically.
Resonate with this so much. Had an opportunity with a company a few years back that paid (just a little) better and provided more long-term opportunities. But I turned it down because they pulled a bait & switch, marketing it as a commercial role (office/retail), then telling me that it'd be focused on SFR communities, with some commercial (maybe). Hate what suburban sprawl is doing environmentally - though understand the supply/demand argument - so I couldn't bring myself to commit for 3+ years promoting something I did not like.
I’m honestly surprised at the hype of this new class. I know nothing about SFR or the trends and numbers behind them, but I never thought of “renting a single family house” a thing.
Who are the consumers renting these homes? I don’t know a single person that has done so. It’s always “I am going to rent at this cool new apartment development for a year and then likely buy my first home”.
The trend, and where I believe you’ll see SFR going, is buying up vacant plots of land and building SFR homes like you might a garden style apartment community. In that manor, it becomes 90% similar to an apartment community and you manage it in the sam way. Sure, it’s SFR’s, but it’s more akin to apartments.
Regarding who is renting - you need to get out of the cities. You’re sample of saying I just hear people saying I’m renting at this cool apartment building is probably too small. Most people, as they age, want more space. More space is an SFR. And if it’s in a community like I mentioned above, it has the cool amenities. The average home costs a little over $300,000 in the US. If you can rent a home, for let’s say 1500 per month, or pay $1100 per month on a 240,000 mortgage ($300,000 house) plus general repairs. There are many people out there who either won’t have the down payment, or won’t want to own. Especially as credit standards tighten, which they have, and it’s become harder to get a mortgage.
Agree. Albeit far less efficiently, and promoting, more than in the past, that you can “rent the lifestyle” you want and never actually own capital.
The target demo is likely not your peers. It's people who can't afford a down payment in the school district they like, or at all. It's transitional families that don't know if they're going to be in the same city 2 years from now. It's people with the millennial attitude who would rather pay a premium to simplify their life, i.e. avoid having to take out a mortgage.
I’ve been thinking about it this way...
Millennials, who have disproportionately driven the increase in desire for luxury rental product in cities over the last cycle are at ripe “family formation” years. Many of those same renters are late 20s - mid 30s and starting/looking to start families. Those major metros where they’re employed by in large have an affordability crisis for for sale product.
Kids/dog/etc require more space, move to the burbs. Static for sale stock and increasing demand increases price. Thereby pricing more people out, forcing them into rental SFRs.
Again, maybe it’s me, but this dramatically impacts the dream of homeownership.
(Probably goes without saying I’m projecting a bit.)
There is data available on this from the census American community survey.
Of around 40 million renter households, 11.7 million rent single family homes.
there are actually more households renting single family homes, than renting in buildings with over 50 units.
I'd bet the vast majority are still owned by "mom and pop" type private landlords and not institutionals
Read the white paper from Altus on SFR, should be free. Tenant pools are completely different. The typical SFR renter is less transient, likelier to be older, have children (though these have become good options for older folks downsizing as well), higher median income, cares about things like a backyard, driveway, school district, etc. Retention is also 70% per the white paper vs 50% or less than that for traditional MF. There is also hype because of the opportunity- most SFR units are owned by individual investors. Approximately 45% belong to landlords who own just one unit (mom and pops) and 87% of investors own 10 or fewer units.1 SFRs are a relatively new asset class for institutional investors. Despite rapid growth, it is estimated that institutional ownership (portfolios with over 2,000 properties) is between 2.1% to 2.5% of the total SFR units, or 350,000 and 400,000 homes. This contrasts with other income-producing product types including Multifamily Rental housing, where institutions own 50% to 55% of the units. When Goldman, TCR, Blackstone, etc are in the space and only want to allocate more capital going forward, you know there is legit opportunity.
On the flip side, there are more options available for renters who desire that product type. I chose to rent a townhome with a direct access garage, driveway etc from a private landlord. It is so much better than the apartment options in my market in terms of quality and the price wise it is comparable and even cheaper in some cases. The tenant pool (less transient, the ones who care about things like a backyard, school district, etc) is also very different here compared to other apartments. If one cannot own or choose not to and desires some single family type features in a home, this is the next best thing.
So major contrarian take from the OP's position, this trend is causing more housing to be built and developed. In markets nationwide, we have major housing shortages leading massive affordability issues for everyone. Increasing supply of SFRs is net positive for most communities, especially as it spurs build-to-rent project. The solution is more housing, that is only answer.
Also, the original move to buy SFH to turn them into rental pools collected tons of vacant houses (by product of 08 mortgage crisis) and made them livable and thus freed up more housing stock into overwhelmed rental markets. Plus, that activity created a lot of jobs.
Clearly there will be some crowding out effects and competition with entry level buyers, but the answer to that is more housing being built. That is really only solution.
+1 SB.
OP Here...
Agree with that— however; the thought is that if your renting SFR, you likely have a family. If you have a family, you want to be in a desirable school district/qual of life. Thus, these SFR projects work assuming the underlying quality of life is there for you family. The underlying land is used more inefficiently for SFR than MF. Spot on re the Mortgage crisis, but I’m parsing (perhaps incorrectly) that to this.
As a side note, I can’t think of a single SFR operator who would breakup home to sell them individually, so it’s really not helping the supply side of the for sale affordability issue, it’s simply crowding out land that would be otherwise used for for-sale product.
Net net, as I see it, they’re (we’re) adding to the housing stock, but not for for the purposes of contributing in some small way of the American dream/homeownership.
A few points (and generally I agree with the above).
- With land use, the build-to-rent SFH or townhome communities are likely there as a result of zoning/land use limitations, apartments would be higher density and thus more profitable and would have been built in all likihood if they could have been on a given site. There is a need for families to rent in all sorts of markets that are suburban and exurban, thus this is actually improving the standard of living for most of the families who rent there (larger/better than local apartment stock). Raising density for development is a major hot button policy debate, but that is probably the culprit (or at least a major on) in many of these market failures.
- agreed, once a house enters one of these portfolios, unlikely to get resold anytime soon. Not the business model, but this could change, and may shift if a house does appreciate substantially due to surrounding area effects. Still, they are rentals for their expected life time.
- Does this crowd-out homebuilders?? Probably not, the margin on sales of new homes likely much much higher, the homebuilder would be the winning bidder (generally, the land I have personally noted going to SFR has been subpar for homebuilders). The real problem is Dodd Frank and CFPB regulations basically making it near impossible for someone to buy without down payment, good credit, and provable income (this is may be good thing). Thus, that cheap for-sale stuff is gone, and new for-sale product is much higher priced (rising construction costs help this too).
- Thus, the "American Dream" of homeownership is much harder for lower income families, rising families with high debts (like student loans), and anyone unable to save for down payments. Before 2008, many lenders gave this crowd "subprime" loans, which actually worked out well for many (yeah, media forgets this). If they could actually afford the payment (something banks and bad loan originators forgot to check for), then they could get a foot hold in housing equity and wealth. In truth, this worked well for many for a long time, today it is tough regulatorily to get those loans so the market is dead.
- The only such loans are all gov't backed (FHA/VA/USDA), and have a lot of restrictions, are not easy to access, and/or have low loan limits that essentially price out much of the housing stock on the market. Thus, a family gets to choose buy something really small in shitty part of town, or rent something decent in better part of town. Many will rent by choice in that dynamic.
- Bottom line, the SFR operators and now developers are really just filling the void that the low cost homebuilders used to fill (IMHO), as to whether and who should get to own vs. rent (and where/what), that is really very subjective. The truth is most Americans get the ability to buy a house because the gov't provides ridiculous subsidies via Freddie and Fannie (I mean is any individual really a good enough credit risk for sub 3% loan??). This has been great for politicians, the real estate industry, and many parts of the economy. The lower income buyers, well we (Congress and Obama Admin) decided they get to be lifelong renters after the 08 GFC. The SFR op/devcos are just filling that demand!
Your logic here is flawed. The first thing that is looked at when looking at SFR is cost to own vs rent. If the cost to own is cheaper then SFR communities aren't built, and today it's hard to scale outside of just building whole communities. Therefore, all the SFR trend is doing is allowing those who can't afford a home to rent a home, providing them with a lower cost "american dream" as you put it. SFR does not drive up housing prices and it does not make owning easier, the only thing it provides is access to suburban homes to those who can't afford the costs associated with owning outright.
Additionally, you need to look at market size. I don't know the % off the top of my head, but I'd be willing to wager <1% or 2% of single family homes are SFR. These aren't any sort of sizeable market share where they're driving market dynamics.
totally agree that sfh renting is good, gives people the ability to live in homes via rent that they wouldn't be able to afford to buy. I think maybe the point is that the institutionalization of sfh as an asset class (let's just say buying single family homes to rent/groups of single family homes being rented, instead of building a sfh community) means that the value of all single family homes will be higher because there is more demand for single family homes, and higher values/more demand means that it will be harder for someone to afford to purchase a home. I am just thinking here, I could be off, but maybe you could even make an argument that the institutionalization of residential real estate, even apartments, as an asset class is detrimental to the livelihood of the renting population. assuming that institutions are more savvy/have higher return thresholds - if institutions bought all the supply owned by mom and pops, then rents would be higher across the board. what is stopping owners of residential real estate from collectively heightening their return thresholds. is this not predatory? is this already happening (look at a chart - looks like median gross rent is rising faster than median household income)? if this is actually the case, it's probably not a good thing, and maybe a reason for that is the institutionalization of residential real estate. however maybe it's not an issue of intuitions vs mom and pops, maybe the reason why this is happening is some other factor like heightened return expectations for owners of residential real estate across the board.
after doing a quick google search it seems like there are regulatory processes that relate to setting prices for something necessary for life like public utilities - utility ratemaking it is called, and these processes have both capital attraction and reasonable energy pricing in mind. what would the criticism be for the idea that some kind of regulatory processes should be enacted in the residential real estate industry, with both capital attraction (reasonable return thresholds) and renting prices in mind?
playing devil's advocate here.
Flippant answer from a grumpy homeowner (and coop owner):
The only benefit to actually owning is the tax writeoffs. Dont get sucked into this "American dream" BS. Owning your own place can suck.
This is a pretty loaded topic that could probably be discussed ad nauseum so I'll try to be concise.
2 Premises to Consider:
1) Most of the SFR ownership is not institutional. These are often people that decided not to sell their prior homes or are renting out future homes. People who are handy an looking to deploy sweat equity. Etc.
2) Institutional SFR ownership is mostly in cheap markets where they can obtain a premium on rent. Example, I pay about $3,000/mo for my apt. If it was a condo, it would sell for ~$1MM. Ownership cost would be $5k+/mo AFTER a $200k+ down payment. The SFR model won't generate a good return in my neighborhood without modeling in crazy appreciation (which has held over the past 10 year TBF). In other markets, homes could be bought for $200k which translates to ownership costs of something in the neighborhood of $1,200/mo. Apartments or homes for rent in those neighborhoods go for $1,500/mo. These are the types of markets that people invest into SFR communities due to there being a healthy premium.
Effects:
Rental rates fall due to supply of SFRs. Ownership costs go up due to demand for homes. This will net discourage homeownership however it will allow people to indulge in the dream of living in a single family home quicker. People that often rent SFRs do so due to need for mobility and because they can't afford the downpayment. Not necessarily a bad thing since S&P returns have outperformed returns that people received on ownership in most US markets. Construction of single family homes will increase which will be a net positive to the average American by keeping net housing expenditures down through increased supply and more efficient management. Net negative for the environment.
I’m going to come at this strictly from the perspective of SFR development and not the model that Blackstone/others have pursued (accumulating scale buying one-off SF homes and renting them). I don’t really have a strong opinion on the latter. For SFR development, I love it from a demand side. They tend to be built differently than a traditional single-family home and appeal to younger families and empty nesters. I think there’s a ton of people who don’t want to own but love the layout of a home versus a townhome/condo/apartment. But man, I would not want to be a long-term owner of this stuff. Ask anyone their annual cost of maintaining their home and then multiply it by 150-200. And fine, you’ll have some scale so it’s not quite that extreme, but far more than $150-300/unit for traditional multi. No one is underwriting a realistic reserve for capital on these things. The cap rate spread over multi is being compressed, so I think core buyers in this space are going to get jammed in the long-run. Ultimately, I’m concerned these are going to turn into money pits, which is going to have some awful effects on ownership and quality over time.
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