As Single Family Rental Ownership Surges, can Management Companies Adapt?
It’s no secret that the residential real estate market has seen incredible growth over the past year. We’ve seen 20%+ YoY rent growth in many markets, an incredible inflow of capital, and a record high renter demand that would indicate no sign of slowing down. One market that has been particularly hot has been single family rentals. During COVID, many renters left major metros and expedited the age-old move to the suburbs to seek more space in a home rental. As things returned to normal, a combination of rising mortgage rates and rising rents in major metros created even more demand for single family rentals. This has created a perfect storm for a boom in the SFR market. Below is a current state of the union of the single family rental space from both an ownership and property management perspective.
Single Family Ownership
Single Family Ownership has historically been a great investment. According to ResidentRated.com, the average tenancy of a home renter is 36 months, which is far longer than the average apartment tenancy of 27.5 months. This means less turnovers and vacancy loss. Additionally, the asset class generally attracts an older demographic that treats the home with more care than the average apartment renter. Many markets provide both appreciation and cash flow, and single family ownership is a cornerstone of wealth building for many Americans.
In the past 24 months, there have been major inflows of institutional capital into the single family rental space. It’s now very common to see billions of dollars of committed capital in partnership with management companies to go on a home buying spree. Owners will set a criteria and issue a mandate to purchase any home in a given market that fits their underwriting. It is not uncommon to hear ownership groups or management companies expecting to double before the end of 2022 simply based on the trajectory of their home-buying partnerships and committed capital. Interestingly, these are generally smaller transactions. Even if you’re buying 250 homes a month, they are usually across 150+ small transactions. This is an incredible undertaking and shows just how much opportunity is out there for growth.
Single Family Management
As demand for single family rental ownership has increased, property management companies have had to adapt and grow to keep up with the demand. One thing that this has produced has been an increase of M&A in the property management space. To break into a new market, it is much easier to acquire a local player and integrate their systems than to hire a brand new team and try to learn the intricacies of the market. Given the historically low multiples property management companies trade for (1–2x revenue), this is a very viable option for many large management companies, especially ones who are are backed by private equity. In my opinion, this creates a massive win-win for both parties. The smaller management company gets access to a larger operating system with brand presence, and the larger company gets access to local market experts who have ties to a network of local service providers.
One of the more interesting developments in the single family rental space has been the rise of vertically integrated property management companies with a brokerage component. Companies like Evernest and Excalibur Homes have pioneered an innovative new model where they help retail investors find a home to buy, offer in-house renovations, leasing, and property management. This is brilliant for a few reasons. Firstly, it fully aligns the retail investor with the management company. The management company is incentivized to find good deals, so that the investor is happy with their purchase and subsequently uses them for management. It also means that the retail investor can have peace of mind knowing that every aspect of the deal will be executed by a trusted team of providers. One of the hardest parts about starting out in the SFR space as a small investor is assembling a team of contractors, brokers, plumbers, etc that you can rely on to provide a top notch service for a good price. Lastly, this model allows the management company to add revenue at every step of the way. Now, they can make money on the brokerage, the construction, the leasing, AND the management. I could not speak more highly of this model and in my mind, this is the future of SFR property management.
Ownership groups are on a warpath to accumulate as many homes as possible, and management companies are doing everything in their power to scale to be able to provide top quality service for these new homes. This has led to an increase in M&A and it is safe to assume we’ll only see more consolidation in the market in the next few years. It has also led to the development of the innovative model of brokerage- to-management companies, which are poised to grow at blazing speeds.
In my opinion, wages that have been relatively stagnant will rise over the next few years and demand for quality single family rentals will only continue to increase. When you take into account higher mortgage rates and low affordability in major metros, the incredible growth we’ve seen in the SFR space should continue to stay strong.