Last modified on February 28th, 2023
By Tim McInerney
Single-family rentals (SFRs) aren’t a new asset type, but the market has exploded in popularity with both residents and investors over the last two years. While this may seem like a surefire growth opportunity for companies looking to expand their fee-managed business, it’s important to understand exactly how SFRs may affect a portfolio before you go all-in. This is especially true for property management companies with multifamily-exclusive portfolios.
To help explore the major similarities and differences between managing single-family and multifamily rentals, I sat down with Dom Beveridge of 20 for 20, along with a panel of SFR industry experts who provided their insights, advice, and real-world experience on our most recent webinar, “Tides of Change: Industry Peers Weigh In on the Single-Family Boom.”
If you missed the webinar, we’ve created a recap available for you here that outlines everything multifamily operators and owners need to know before riding the SFR wave.
SFR demand is high and continues to rise
We started the webinar by discussing how today’s explosive demand for SFRs is being driven by both residents and investors.
It’s clear that residents are looking for the opportunity to live in a single-family home:
- 78% of renters are interested in living in SFR communities
- Internet searches for “homes for rent” tripled between 2020 and 2021
Much of this resident-driven demand was initially set in motion by the pandemic, which saw renters moving from urban centers into outlying suburbs where SFRs are more abundant, spacious, and affordable. However, several webinar panelists also noted significant demand is now coming from residents who want to enjoy the freedom and flexibility of a single-family home but are unable to buy because of skyrocketing prices and rising interest rates.
In response to resident demand, property managers and owners are already increasing their investment in and supply of SFRs:
- 14,000 new SFRs will come online in 2022, which is double the previous record
- 25% of the largest property owners will have SFRs in their portfolio by 2030
- One billion+ dollars have flooded the single-family/build-to-rent segment
While SFRs haven’t traditionally been the focus for multifamily operators and owners in the past, many are now seeing the asset class as a new way to expand business. As I mentioned in the webinar:
“We know in real estate that trends typically have a follow-along effect. As risk is mitigated and the business model is proven, more and more folks are comfortable moving into an asset class. SFR is no different.”
SFRs are an opportunity and a challenge for multifamily operators
On the “Tides of Change” webinar, all four panelists echoed seeing the same SFR resident demands in their own businesses. Two panelists specifically provided powerful evidence for why multifamily operators and owners are rushing to embrace a new asset in their mix:
- Steve Duerre at The Equity Group said, “Single-family rentals are the #1 choice for prospects when they’re contacting us. We’re getting less apartment leads and more single-family leads. There’s a lot more money in the single-family market.”
- Wendell Burris at Minnix Property Management said, “60% of our [SFR] properties are rented site-unseen.”
Based on supply and demand alone, it’s clear that SFRs hold massive potential for multifamily operators and owners. However, SFRs still come with management risks and are subject to many of the same headwinds residential and multifamily real estate spaces experience, too.
Patrick Bain, President at Long & Foster Property Services, outlined exactly what these risks look like today and what his organization is seeing:
“In 2022, active listings for sale and rentals are down upwards of 40%, compared to 2019 levels. And now you have a demand challenge as well. You’re looking at 30-year fixed on the residential side pushing north of 5% and racing toward 6%, which is an interest rate that this generation of homebuyers and ‘refi’ borrowers have not seen this high in a long time. Also, we’re coming out of a pandemic that negatively impacted owners, because you could not charge late fees, you could not evict, you could not take adverse action if someone wasn’t paying rent.”
In addition to facing inventory and financial challenges at the owner level, Dom Beveridge also noted in his recent blog post “What Multifamily Can Learn From Single-Family Rentals” that SFR owners are incredibly diverse in their industry and market knowledge; this can actually pose additional challenges for property management companies:
“Some operators aggregate ‘accidental landlords,’ e.g., those renting out their homes rather than selling them when they move house. Others grow by working with landlords to help them grow their own SFR portfolios.”
Because many SFR owners typically come into property management because of a housing or an economic downturn (for instance, being unable to sell due to an underwater mortgage, as was commonly seen during the financial crisis of 2008), they often fall into the “accidental landlord” category. That means they may not be as industry-savvy or knowledgable about what being an SFR owner fully entails.
Centralization is key to successfully managing SFR and multifamily assets
When it comes to managing multifamily rentals, the economics of running properties are often mitigated via centralization. When set up properly, the same can be done with SFRs in your portfolio mix. Here’s what the panelists recommended when it comes to effectively, efficiently, and successfully managing a mixed portfolio:
- Centralize processes into a single system: Just because you have fragmented properties doesn’t mean they have to splinter your existing processes. By having one central platform that connects every property, you can track everything like usual and drastically decrease the chances something will be missed in the mix. This is something Jessica Koonz, CPA, Chief Operating Officer at Icarus Investment Group, has seen success with at her own organization. For her team, the benefit of having information processed through one central software solution means nothing gets missed, nothing is overlooked, and there’s ultimately no difference on whether it’s coming from an SFR or multifamily property. Properties are managed consistently and receive the same level of service.
- Centralize SFR locations: Even if they’re not right next to each other, setting up an SFR portfolio that shares a core geographic area can help ease the time and effort it takes to manage them. It’s even better if that core geographic area is right in or around any existing multifamily locations. This approach means you can share resources more easily, such as having maintenance techs from your multifamily properties work on nearby SFR properties.
- Centralize your departments, if possible: Just like centralizing processes into a single system, our webinar panelists recommend centralizing departments so there’s one flow of information in and out. For example, have one lead maintenance department for all maintenance teams, one directing leasing department for all leasing representatives, and so forth. This way, only one department is handling one very specific piece of the process, which helps minimize the chances of things getting lost between multiple, drastically different to-dos on one person’s list.
Ultimately, SFRs pose incredible opportunities for growth, but you have to make sure your property management company is set up and ready to incorporate and manage them in the right ways.
Want more advice on how you can incorporate SFRs? Download our free growth strategies playbook below.
Comments by Tim McInerney