American Realty Advisors


Market Commentary, May 19, 2022

In Conversation: Single-Family Rentals

ARA CEO Stanley Iezman and Head of Research Sabrina Unger discuss the growing role of single-family rentals in real estate portfolios. They talk about ARA’s approach toward purpose-built single-family rentals, key areas of risk, as well as the need for more housing in the United States.


Stanley Iezman: We have been investing in single-family rentals only recently, but we’ve been investing in multifamily properties for a number of years. What is the rationale from your vantage point of why we’re moving into the single-family rental space?

Sabrina Unger: I think ultimately it is driven by tenant demand. If we think about what drove the traditional multifamily cycle – the most recent cycle – it was millennials. Now they’re aging, they’re starting families, and yet they’re still straddled with the same student loan burden that prevented them from entering the for-sale market many years ago. They’re getting older, having children, and they want that family-friendly lifestyle, but they still can’t get into the for-sale market. I just saw a statistic that 69% of households, so roughly seven out of 10 households would not qualify for a mortgage under today’s lending conditions. When you think about it, it’s really a natural evolution of what the institutional owner can offer to renters. We’re really just filling in that part of the renter spectrum.

SI: Is this a core product or is this a value-add product?

SU: I think it can be both. Purpose-built single-family rental can be both core and value-add depending on how we approach it. If we’re taking on entitlement and development risk, that’s much more on the opportunistic side and definitely a value-add component, versus if you buy it where it’s already been developed, it’s stabilized, it behaves very similarly to that of traditional multifamily, so very much a core product in that profile.

SI: Let’s talk a little bit about risk. We have traditional ways of evaluating risk on multifamily properties, but when you’re dealing with single-family rentals, is it a different risk profile?

SU: I think what often is overlooked in the risk profile of purpose-built single-family rentals or of single-family rentals in general, is the fact that there are two risk categories. The first is jurisdictional, and the second is operational. What we’re seeing is a lot of pushback of institutional owners owning single-family homes. Jurisdictions believe that if Wall Street is owning the homes, it’s keeping a would-be buyer from being able to purchase.  So you’re often seeing that there’s some pushback in terms of the number of homes any individual owner can have for example, but that’s why we like the purpose-built communities, as opposed to the scattered approach, because you know right off the bat, what the jurisdiction is going to allow. And it ‘s a bonus or insulated upside, where if you bought the purpose-built single-family rental and then after the fact, they change what’s allowed, you’re sort of insulated from future supply, so that’s a really nice place to be. So that’s the jurisdictional risk. But on the operations side, it relates to higher op-ex and cap-ex. These are larger communities, they’re larger units, and that entails having higher maintenance cost, higher turn costs. You’re not painting a one-bedroom apartment anymore, you’re painting three bedrooms, a living room, an upstairs, a downstairs. I think from an operations perspective, there can be groups that maybe underestimate what those line items would be and can encounter some unwelcome surprises.

SI: With rents going up over the last several years and the demand for multifamily, as well as single-family and purpose-built projects being what it is, are you concerned about jurisdictions superimposing rent controls or other limitations in terms of ownership?

SU: I think there has been a lot more talk about rent controls and from jurisdictions that we otherwise might not have thought of as being high risk for that. But what the studies have historically shown is that rent controls actually serve to quelch future supply – it deters future development, so I think a lot of jurisdictions are rightly approaching it tactfully, and I don’t envision that it becomes such a widespread issue.

SI: You and I have been talking a lot about the issue of essential housing and the missing middle – the ability to be able to provide what we would call affordable housing for people in the $40,000 to $80,000 income range, because of the challenges of being able to build that effectively. Are purpose-built single-family rentals a type of product that would work for this cohort?

SU: I think there are certain projects that definitely would fit the bill. Ultimately, at the end of the day, everybody deserves a safe place to live, and so when we think about purpose-built single-family rentals, we’re adding supply – we’re adding new housing to the stock, so that should help alleviate affordability across the spectrum. More housing creates affordability for folks. But I think we think about single-family rental solving for a slightly different cohort – we’re allowing those families that might not otherwise be able to buy still have that family-friendly lifestyle, still have the space that they need, but not tie up their capital in a down payment. So that allows them to pay off debts faster, it allows them locational flexibility in the event they encounter a better job, they can move without having to sell a home. I think it’s a real positive for communities overall, and it’s a real complement to that true middle-income essential housing renter.

SI: Do you think the idea of private investors going out into areas that are lower income and buying single-family houses and converting them into rentals, and putting in ADUs, do you think that area of gentrification and adding additional housing is going to be accepted and embraced by communities, or are there challenges?

SU: There are absolutely challenges – we’ve heard the expression NIMBYism, “not in my backyard”-ism. Everybody understands that the U.S. is underhoused, and we all agree that we need more housing, but nobody wants it in their own backyard. This is the challenge that jurisdictions are facing: how do we balance the demands of homeowners that want their values protected with the needs of a community and the need for housing. It’s a difficult topic.  

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