Want to know where the best markets are to find tenants for your single family rentals? Could you use some clues to help you market your rental to potential tenants? Do you know how much rent to charge compared to apartments with whom you compete?
There’s a reason hard information on single family rentals is hard to find (See SFR: Birth of a Category). Virtually all the numbers you see for average rents or vacancy rates come from multifamily sources such as commercial real estate databases like Costar or REIS and rental websites that carry predominantly multifamily rentals. Their data is meant for developers and multifamily investors, not residential investors like us.
Single Family Rentals Now are Dominant
Until lately no one even knew how many single family rentals there were out there. It took the Census Bureau, not the speediest source of information, to make it official. The Census Bureau’s Property Owners and Managers Survey, based on 1995 data, was recently updated to document the explosive growth of single family rentals (See Foreclosure Markets Spawn Single Family Rental Boom.)
Now a new study, one of the very few to look into the single family rental segment, is filling in the gaps. By CoreLogic economist Sam Khater, the new study, reported in the company’s monthly newsletter, found that single family rentals are $3 trillion business today and account for 21 million rental units—52 percent of the entire residential rental market. In other words, the number of single family rentals in the market today has surpassed apartments.
“Single family rentals are very distinct from multifamily and they behave very differently,” said Khater in an interview with Real Estate Economy Watch. Unlike multifamily, millions of single family rentals are listed on MLSs by real estate brokers, many of who represent new owners in acquiring investment properties. As the for-sale inventory has trended down since 2005, the rental share rose 13.3 percent last year alone. As of the end of last year rental closings were up 11.5 percent year-over-year while prices fell 9.8 percent during the year. Demand is strong. The national average months’ supply for single family rentals was 4.5 months in December compared to 6.2 months for homes listed for sale.
For investor/landlords, Khater’s research provides some helpful clues.
Single Family Vs. Multifamily
Single family rentals, usually stand-alone properties in ownership settings, appeal more to families than multifamily. In fact, the typical SFR tenant is a family that has just left a foreclosure and can afford to pay the rent on a former foreclosure but could not make the mortgage payment on their old home. Over the past five years, foreclosures have turned more than 3 million homeowners into renters. A large percentage of these new renters are renting former foreclosures similar to the homes they lost. Located in largely ownership neighborhoods, their rental status is often invisible to their neighbors.
Virtually no formal research has been done on single family versus multifamily rents, which is a real problem for investor landlords since virtually all of the rental numbers they will find on the Internet are multifamily or both multi and single family lumped together even though there are now more single family rentals than multifamily. Yet there are big differences that impact rents. With a single family home, tenants get a lot more space than an apartment. They also get a family-oriented neighborhood, a yard or garden, green space, more storage space, parking, privacy and security. Multifamily amenities like fitness center, parking, pool, recreational areas may or may not be included in the rent.
There may also be great differences in costs. From the property management perspective, managing 500 units at one site is immensely cheaper than managing 500 units at 500 sites. Many investors reduce their maintenance costs by doing upkeep and maintenance themselves, but they still are out of pocket for gas and supplies, not to mention time and labor. Maintaining yards, driveways and the larger space of a single family rental all should be reflected in the rent.
Khater found that that the average SFR rents for about 1.5 to 1.6 times the average multifamily unit. However, his was not quite an apples-to-applies comparison. SFRs are generally larger than apartments, beginning at two bedrooms and up whereas apartments include studios and one bedrooms.
Recently I asked Jon Pastor, CEO of Rent Jungle, which lists over 700,000 rentals from 12,371 web sites, to calculate and compare average rents for 2-bed singe family and multifamily units. He found that SFRs nationwide average $1,345 per month compared to apartments nationwide at $1,237—a difference of only 9 percent. However, his comparison did not account for the greater square footage a house provides vs. an apartment, including larger family, kitchen, living and storage spaces.
It wouldn’t be difficult to calculate the media square footages of apartments in developments that you compete against and figure out what they are charging per average square foot. You are marketing to a tenant who can probably afford to pay more than the apartment tenant and who certainly is going to get more with your unit. And don’t forget… on a per unit basis, your maintenance costs are going to be higher than your multifamily competitor.
If you could move anywhere in the nation and start a buy and hold investment operation, where would you go? Khater suggests you follow the foreclosures because that’s where a ready-made market of displaced families will be. You can find tenants from their lenders or real estate brokerages that specialize in REOs and short sales. Moreover, markets with growing foreclosure and short sale inventories usually have the greatest discounts and best bargains. (For more on where to find the best discounts today, see Discount and Distressed Marketshare Decline.)