As a single-family rental (SFR) investor, it’s crucial to stay informed about the state of the current real estate market as well as where it’s going. Depending on your standing in the industry, a changing real estate market can affect you differently. By staying on top of market trends, you can plan your investment strategy for the new year.
Lessons Learned from SFRs in the Southeast
This year, some SFR markets performed better than others. Across the board, however, there was ongoing talk about institutions homing in significant markets across the United States.
Institutional investors typically go after major markets like Atlanta, Jacksonville, and Tampa. Instead of competing with institutions, individual investors would look to secondary markets like:
- Baton Rouge
- Kansas City
- Oklahoma City
In 2021, this strategy worked—for the most part.
This strategy became more critical as institutions priced individual investors out of larger markets. This scenario wasn’t that much of a concern during the first half of 2021. However, the institutional competition got stiffer as the year progressed, compelling individual investors to look elsewhere for profits.
What This Competition Meant
Individual real estate investors usually don’t have the buying power of institutions. They also don’t have the capital to access portfolio sales.
Towards the middle of 2021, individual investors got priced out of common markets for these reasons. Later, however, they even started to face institutional competition in smaller markets like Jackson and Baton Rouge.
At the end of 2021, individual investors also competed against investors who operate in the same class. All this competition means that individual investors must start looking for new markets.
What About the Rest of the US?
There was a lot of rental investment activity across the US in 2021. For example, individual real estate investors from areas like Jackson, St. Louis, Missouri, and Indiana sought investments in Chicago, where property taxes are lower. Chicago also has a similar tenant base as these surrounding areas.
As a result, the Midwest saw a surge in individual SFR investment activity. Simultaneously, there was increased competition from institutions in primary SFR markets.
The Big Players Made the Marketplace Smaller in 2021
2021 did indeed see a flurry of rental investor activity. Some large portfolios traded well above historical prices. However, something was different that year. Typically, institutional investors had a ceiling on prices. In 2021, however, $10 to $20 billions of capital flooded the institutional investment space.
There was an unbelievable amount of interest in real estate institutional investing. Many individual rental investors shifted their efforts to the Midwest in the face of this added buying power.
Historically, individual investors stayed away from the Midwest. Now, they’re trying to figure out how to operate there efficiently.
What about the era of higher interest rates?
Now, with elevated interest rates, an ongoing low inventory of homes, and steady demand for quality rental homes, investors must stay nimble and on top of market trends to deliver the product today’s residents want.
What Lies Ahead for Individual SFR Investors?
Millennials are now forming new households concentrated around major cities. There’s a lot of opportunity in serving their needs. However, millennials have different wants and needs compared to their predecessors. They still want good schools, but they also want more space and a home office. Also, they want a suburban environment that’s near a big city. These locations give them access to their jobs.
Properties that meet these requirements have already increased in value considerably. Still, experts believe these areas are where the long-term opportunities for individual rental investors lie.
Why This Strategy Works
Currently, there are a lot of tenants looking for properties just outside of major cities across the United States. These tenants want it all—close proximity to good schools and job opportunities. Again, they also want more space. Fulfilling this demand represents an opportunity for savvy single-family rental investors.
However, individual investors must now compete with institutions as they spread out looking for more opportunities because the institutions have some advantages. For instance, they have direct access to the MLS, and they can snap up a deal whenever they please. What’s more, they can write a deal and make an offer within an hour.
Focusing on an Emerging Market
As a result, individual SFR investors will have to take advantage of an alternative strategy. Instead, smaller investors will need to look for pocket listings. Most likely, these properties will need some work. In other words, you’ll want to look for rehab-to-rent projects throughout the year.
Individual investors may need to take a different approach by committing equity and debt upfront. Still, this gives them a unique opportunity to renovate homes to meet the needs of the emerging millennial market.
For example, you might consider investing in a nicer kitchen, bathroom, and flooring. By making these kinds of upfront investments, you can even continue to find opportunities in larger markets.
Smaller Investors Can Leverage Their Position
It might surprise you to learn that these circumstances give individual investors another advantage. Despite their deep pockets, institutional investors have a strict construction risk limit. They won’t invest more than a certain amount in renovations.
All investors have different tolerances for risk. However, you can still take advantage of opportunities by investing sweat equity, even if you don’t do the work yourself.
As an individual investor, you can also move faster. Institutional investors can’t capitalize on new markets as quickly as private buyers. As a result, flexibility is another significant advantage that individual investors have over institutions.
There’s Still Room for All the Players
Today’s individual real estate investors have more power to add value to a property. Resultantly, they can take advantage of discounted properties. This is a significant advantage over purchasing a fully improved property.
You can charge smaller rents with a smaller investment and still yield better returns. These circumstances will enable you to compete with the rest of the market.
If you want to compete against institutions, this is how to do it as 2024 unfolds.
Your Partner in SFR Investing
Marketplace Homes has teamed up with experts if you want to learn more options for your investment strategy as we enter the new year. Together, we’ll help you explore your options from several perspectives. Please feel free to take advantage of our years of combined expertise.
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Troy Evans is the Director of Investor Services at Marketplace Homes with a focus on business development and portfolio management across their nationwide portfolio. Troy previously held other positions in the past ten years at Marketplace Homes, including sales. With a passion for single family rentals, he is looking forward to helping establish Marketplace Homes as the go-to partner in the SFR and BFR industry.