The Single-Family Rental (SFR) market continues to be a robust asset class, driven by favorable supply and demand dynamics. At a recent panel hosted by Pratik Gupta of the Bank of America Institute, industry leaders discussed the bright outlook for SFRs. The discussion highlighted several key trends and provided valuable insights for investors considering the rental property market, especially in growing cities like Memphis, TN.
Key Takeaways from the Bank of America Institute Panel
Pratik Gupta’s panel included experts like Nishu Sood, Head of Research at Progress Residential of Pretium Partners; Charles Schetter, Managing Director of JTW Advisors; Teri Miller, CFO of FirstKey Homes; and Jim McGinley, EVP at MORE Residential. The consensus among these industry leaders is that the housing market remains a strong asset class. Currently, there are 130 million homes in the U.S., with approximately 43 million occupied by renters. Of these, nearly 15 million are single-family rentals, but institutional investors hold only 400,000 to 500,000 units, representing a mere 0.4% of the housing stock.
The panel forecasted that home price appreciation (HPA) would be around 4% this year, with rent growth for single-family units expected to be around 5%, potentially increasing in the latter half of the year as multifamily supply peaks. Real estate investors that acquire properties with a 25% down mortgage are expected to receive a 16% annualized return on investment from this 4% appreciation rate. 4% / 25% = 16%.
SFR Outlook and Opportunities
The chronic housing shortage has made SFRs a compelling investment. Young people, unable to afford homeownership, are increasingly turning to rental options that provide the feel of a single-family home without the financial burden of ownership. The median income of tenants in institutional SFRs ranges from $85,000 to $120,000, compared to $40,000 for the average renter nationwide. This income demographic allows operators to maintain a rent-to-income ratio of 20-25%, giving them room to increase rents while keeping them affordable compared to the cost of buying a home. There are around 9 million tenants with incomes above $80,000, presenting a substantial market for SFR operators .
Expert Insights from CRE Daily and Roofstock
Don Walker of John Burns Research & Consulting echoed similar sentiments in his recent discussion with Redwood Living, Inc. He noted that high mortgage rates have significantly reduced home affordability, with many households now spending 46% of their income on homeownership costs, compared to a norm of 32%. This affordability crisis is driving more people into the rental market, particularly build-to-rent communities, which saw occupancy rates soar post-pandemic .
Roofstock’s February 2024 SFR Investment Outlook also highlighted the resilience of home values and the strong demand for rental properties. Despite a slight pullback in large investor activity in 2023, the overall market fundamentals remain strong, with favorable demographics and limited housing supply supporting property values. This bodes well for SFR investments in the coming years .
Memphis: A Prime Investment Destination
Memphis, TN, stands out as a prime location for SFR investments. The city is home to several major corporations, including the largest Nike distribution center in the country, an Amazon Robotics technology fulfillment center, and FedEx’s global headquarters. Additionally, the nearby Blue Oval City and the advanced battery factory in Marshall County, Mississippi, contribute to the region’s robust economic landscape. Memphis also boasts a significant medical center in the city center, further solidifying its position as a hub of economic activity.
These corporate giants provide a steady stream of employment opportunities, attracting a diverse and affluent workforce that is likely to seek quality rental housing. The influx of professionals and families moving to Memphis for these opportunities creates a growing demand for SFR properties. For investors, this translates to a stable tenant base and the potential for steady rental income growth .
Why Invest in Memphis SFR Properties?
- Economic Growth and Stability: Memphis’s diverse economy, bolstered by major employers like FedEx, Nike, and Amazon, ensures a stable job market. This stability attracts a reliable tenant base, reducing vacancy risks for rental property investors.
- Affordable Entry Points: Compared to other major metropolitan areas, Memphis offers more affordable property prices, allowing investors to enter the market without requiring exorbitant capital.
- Strong Rental Demand: The high cost of homeownership, coupled with Memphis’s growing population, drives strong demand for rental properties. This demand ensures that rental properties remain occupied, providing consistent rental income.
- Appreciation Potential: With home price appreciation expected to be around 4% this year, properties in Memphis are likely to increase in value, offering capital appreciation in addition to rental income.
The insights from the Bank of America Institute panel, combined with expert analyses from CRE Daily and Roofstock, paint a promising picture for the SFR market. For investors looking for opportunities in this sector, Memphis, TN, presents a compelling case. The city’s economic growth, coupled with the strong demand for rental properties, makes it an ideal destination for investment. As the market continues to evolve, investing in Memphis SFR properties could yield substantial returns, both in terms of rental income and property appreciation. Now is the time to seize these opportunities and be part of the thriving rental property market in Memphis .