Multifamily Owners Consider Plusses and Minuses of Single-Family Rentals

At the recent National Multifamily Housing Council (NMHC) Spring Board Meeting, the multifamily audience listened to a discussion of the pros and cons of singlefamily rental ownership and operation.

The single-family rental business, currently run by small “Mom-and-Pop” players, offers an untapped opportunity for institutional ownership and management, say proponents. At the recent National Multifamily Housing Council (NMHC) Spring Board Meeting, speakers on a panel discussed the pros and cons of single-family rental ownership and operation.

Institutional players currently own just 1 percent of the single-family rental market, compared to 15 percent of the multifamily market. If the institutions have the same penetration of the single-family market as of the apartment market, they could easily grow their market share by 50 percent very quickly, said one speaker. Institutions can offer professional management, quality homes and services the customer is seeking, according to the panelist.

The characteristics of single-family rentals depart in important ways from those of apartment homes. From investors’ points of view, there may currently be the same access to capital for the product type, but the execution of the two product types is very different. Single-family assets are much more dispersed over a greater geographic area, and there may be fewer economies of scale obtained in many areas of operation. For example, a bulk owner may have to contend with 9,000 roofs and an equal number of separate tax bills. Each home will have to be separately underwritten.

On the other hand, the typical customer of single-family rentals may tend to be different from that of apartments: they are older with children. Consequently, the resident retention rate for single-family rentals is in a different league from that of apartments: three years, with an average turnover rate of about 30 percent, as opposed to 60 percent in multifamily. Turnover costs per square foot may therefore be reduced. Nevertheless, one panelist said that comparable NOI margins of single-family rentals are lower—60 percent.

The share of single-family housing has increased from 25 percent to 30 percent of all rental housing in recent years, and more institutions are aggressively expanding in the business. During the Great Recession, the government had engaged in a bulk sell off of foreclosed homes for cents on the dollar to large investors, which it said would help restore neighborhoods. Homes could still be purchased at well below the cost it takes to construct them, said one panelist. His company has been able to increase rents by 3 to 5 percent in its single-family rentals, with no effect on turnover.