The single-family rental (SFR) sector and its close cousin, the fix-and-flip market, are now essentially treading water in an environment of high interest rates, approaching 8%; high home prices; and a dearth of home-purchase inventory.
Still, even in this difficult-to-agonizing supply-challenged housing market, SFR and fix-and-flip investors, which both target existing-home inventory, are still finding ways to make a profit — at a thin margin in most cases, but a profit, nonetheless. That’s particularly true for mom-and-pop investors across both market segments.
Companies and individual investors in the SFR sector focus on purchasing existing single-family homes or building them for rent. Fix-and-flip investors — who tend to be smaller entrepreneurial players — acquire, renovate and then sell existing single-family homes — and, in some cases, hold them for rent for a time, depending on market conditions.
Experts in both those housing-market sectors say smaller investors are leading the charge now in an inventory-depressed market, in part, because they have a more flexible return-on-investment threshold.
“Our data shows that home flipping activity around the United States dropped during the second quarter of 2023,” said Rob Barber, CEO of real estate analytics firm ATTOM. “… At the same time, profit margins on typical home flips jumped almost 5 percentage points, from about 22.9% in first quarter to 27.5% in the second quarter.
“… The latest investment return (ROI) for home flips certainly isn’t great, [however]. It remained way below the 44.6% level from the second quarter of 2022 and far beneath a recent peak of 60.8% hit in the second quarter of 2021.”
Barber added that, unfortunately, the current profit-margin mark “could easily be wiped out by flipping carrying costs — mainly mortgage payments, renovation costs and property taxes.” That reality appears to have helped convert more than a few fix-and-flippers to the role of short-term landlords in the SFR market.
Although the home-flipping rate (flips as a percentage of overall home sales) dropped quarter over quarter during the first half of 2023, the actual number of home flips was up slightly over that period, according to ATTOM’s data. Total home flips jumped slightly from 82,180 in the first quarter of this year to 84,350 in the second quarter. Over the same period last year, ATTOM’s data show, total flips came in at about 130,000 per quarter.
Another real estate-analytics firm, CoreLogic, issued a report in August that tracked investor home purchases in the SFR space in the second quarter of this year. It shows that home purchases by these investors declined by 90,000 year over year. CoreLogic defines an investor as an individual or corporate entity that has retained three or more properties at the same time within the past decade.
“Throughout Q2 2023, large [100 to 900 properties] and mega-investors [1,000 or more properties] showed muted activity,” the CoreLogic report states. “In April, May and June [of this year], large and mega-investors each made between 7,000 and 9,000 purchases per month [or a total of 21,000 to 27,000 in each category, which translates to a market share of between 8% to 10% each month].
“… In the case of mega-investors, this is a drastic decline from the high of 17% of all investor purchases recorded in June 2022. … Small investors [three to nine properties] made 38,000, 46,000 and 38,000 purchases [122,000 total] in April, May and June [2023], respectively.”
The CoreLogic report also notes that SFR investors are now more likely to be smaller players, operating three to nine properties. In June, the report states that this group “accounted for 47% of investor purchases, the highest level since 2011.” Still, the CoreLogic report notes, that even among the small investor group, purchase activity in the second quarter of this year represents “a big drop from 2021 and 2022.”
“Inventory levels continue to be constrained, partially because many owners are unwilling to sell and give up the low interest rates that current borrowers secured by refinancing during the pandemic,” the report continues. “This trend could potentially be behind the rise of small investor activity [in the SFR sector] in recent months, as members of this group may have chosen to rent their properties rather than sell.”
Longer hold times for fix-and-flip investors also may be contributing to the rise of mom-and-pop rentals as well.
Arvind Mohan, CEO of fix and flip lender Kiavi, said his company’s data shows that in 2019, just prior to the pandemic, 45% to 50% of homes purchased by fix-and-flip investors were sold within six months of the purchase date. Last year, that figure decreased to 33% — but jumped up to 42% as of the first quarter of this year.
“One of the inferences is that … flippers are holding onto properties for longer time,” Mohan said. “So, it’s rented out [as an SFR] or to take advantage of further HPA [home price appreciation].”
Other datapoints paint a picture of SFR and fix-and-flip sectors that remain active and opportunistic, but with deal-flow at much lower levels than last year due to high rates and low housing inventory. Sector leaders are predicting more of the same for 2024.
Shifting market dynamics
Brandon Lwowski, senior director of research at HouseCanary, a proptech firm that provides institutional investors, lenders and other clients with residential real estate analysis, said there are some 75 mega-SFR companies nationwide, those operating more than 1,000 single-family rentals — a figure that he said has remained fairly constant over the past three or four years.
Lwowski added, however, that HouseCanary’s data shows a big shift in the mid-sized SFR market segment (those controlling 50 to 99 SFR properties), whose numbers have dwindled from around 700 in 2021 to fewer than 300 this year.
L.D. Salmanson, CEO of Cherre, a leading real estate data-integration and analytics platform with a focus on the SFR market, said the largest SFR players — institutional investors that now control between 3% to 5% of the SFR market — this year have shifted their strategy away from buying homes on the open market and toward build-for-rent (BFR) opportunities.
The National Association of Home Builders estimates that 69,000 BFR homes started construction last year, up 33% year over year. That estimate includes only homes built by builders and held for rent. It excludes homes sold to another entity to be rented, which the industry group estimates may add another 5% or more single-family home starts to the total.
“They [large institutional SFR entities controlling thousands of rentals] are so thirsty for supply, they’re not only buying what’s on the market,” Salmanson said. “They’re buying future [new-home] supply [from builders], so they’re locking up future demand as well.”
He added that smaller SFR players — those with 10 or fewer properties — control 80% or more of the SFR market. At the top of the market, however, he said the largest players are buying out SFR companies in the mid-range of the market — which helps to explain HouseCanary’s data showing a reduction in mid-sized SFR operators over the past few years.
“A big strategy we see right now [for the largest institutional SFR players] is portfolio acquisitions,” Salmanson said. “So, anything between 100 and 250, or even 50 to 250 [SFR units], those are the prime portfolio [targets].”
Although the SFR market is essentially treading water now until market conditions improve and are more favorable for the sector, Salmanson remains bullish on its future long-term prospects due to market dynamics that favor renting over buying for many individuals and families.
“Out of the 110 million to 115 million or so [existing] single-family homes in the US, somewhere between 15 million to 16 million are SFRs,” he said. “That’s [SFR number is] going to double by the end of this decade….”
Rise of the mom and pops
Fred Matera, chief investment officer at Redwood Trust, which operates CoreVest, a division focused on providing business-purpose loans for investment-property purchases, said the “smaller and middle market sector of the [SFR/fix-and-flip] industry has historically been a core client base for us at CoreVest.”
“These smaller investors generally have lower return targets for their equity than the larger institutions, who are much more influenced by the global increase in [investment] return bogeys for equity investors that the market has experienced over the last 12 to 18 months,” he added. “This helps to explain why individuals and smaller investors are able to pay more for a home and tolerate a lower return than an institutional investor, at least in this current market created by the monetary-policy tightening.”
The rise of the mom-and-pop investors, then, is being propelled by their ability to tolerate tight profit margins — as inflation continues to bump up costs while strong home prices still make it possible for them to still eke out a narrow return on investment.
“Today, there are more financing alternatives available to these investors than there have been previously, which certainly facilitates the ability for mom-and-pops to purchase investment properties,” Matera added. “In particular, we are witnessing this trend in terms of the demand we are seeing for our DSCR [debt-service coverage ratio] product, … [which is] designed for these types of investors.”
Still, even for the mom-and-pops, the low levels of housing inventory in play are making for a difficult operating environment. As evidence, the number of private-label securitization (PLS) deals involving DSCR loans as part of the collateral pools [typically up to about half of the loans by count] is down considerably this year so far, compared to 2022.
PLS data provided by Kroll Bond Rating Agency shows that year to date as of mid-October, there were some 49 PLS deals valued at $18.6 billion involving DSCR loan collateral. That compares with 90 deals last year over the same period valued at $35.1 billion.
The securitization picture for largest institutional investors this year is even more bleak, however, with only three PLS deals issued through mid-October. Those securitizations were valued at $1.1 billion and involved collateral pools with a total of 4,346 properties. That compares with 13 deals in 2022 valued at $9.1 billion involving collateral pools with a total of 30,247 properties, KBRA data shows. (Of course, not all properties purchased by institutional investors are securitized, although securitization is a major liquidity outlet for the class.)
“You know, we’ve got a million houses on the market right now,” said Kurt Carlton, co-founder and president of New Western, a national private real-estate investment marketplace serving some 150,000 investors. “In 2006, we had 4 million houses on the market, so there’s just a tremendous lack of inventory.
“… But remember, you have the exit of [institutional] SFR [players from the open market] and IBuyers, so close to that whole segment of the market has gone away [or is far less active as buyers], and those guys were a big part of the market.
“I think you’ve got the independents [or mom-and-pops] taking the market share back. … The consistent theme here, I think, is that there is still a tremendous demand for housing, and I don’t think that’s going away, so I don’t think asset values are going to plummet.”
Still, Kiavi’s Mohan is not very optimistic about the housing market and the landscape for investors in the year ahead. He said the housing market is now riding out an environment of “low inventory and high rates.”
“I think what we see right now is a continuation of that trend, essentially,” he added. “So, we’re in a bit of a malaise now, and things are just stuck.
“And we don’t see anything impending that really drives a significant change in 2024. It’s almost kind of that transition year for the market as we work through inflation and the rate market, and the implications there.”
Rick Sharga, CEO of CJ Patrick Co., a market intelligence and business advisory firm focused on the real estate and mortgage industries, predicts that rising financing costs, if not abated soon, are likely to fuel a “bit of a dip in home prices” in the near future. He said the large institutional players now on the sidelines in the open market “may be waiting to buy on the dip and are keeping their powder dry until they can maximize that buying opportunity.”
“I think if we’re looking at fix-and-flip investors and single-family rental property investors, things will gradually improve as we get through the end of this year and into 2024,” Sharga said. “I think the reason for overall optimism is that the numbers [including rental rates and home prices] still favor real estate investors in the long run — the math does.
“We have millions of millennials and Gen Z individuals who are coming of age to form households. … And the overwhelming majority of them would prefer to live indoors.”
