[REN #888] Post Covid-19: Experts See Increased Demand for SFRs

Post Covid-19: Experts See Increased Demand for SFRs, Real Estate News for Investors Podcast Episode #888

We’re sure to see some changes in the post-pandemic economy, and one of them could be an increased demand for single-family rentals. Potential homebuyers who have been furloughed or have lost their jobs no longer qualify for mortgages. Those who do have their jobs may not have the down payment, high credit score or reserves needed to get a loan. But with the concern that social distancing could be a longer-term way of life, they may also prefer to rent a single-family home instead of an apartment if they are forced to remain renters for awhile.

The COVID-19 pandemic has put many things into perspective including the value of living in a home with a yard. After being cooped up in an apartment for more than a month and counting, it seems logical that at least some apartment renters might decide to move into single-family homes.

Renting Better Option for Some People

The CEO of Mynd Property Management told the National Real Estate Investor that he sees even more people wanting to rent homes instead of buying. (1) He says, “In times of financial and healthcare crises, which may become more frequent, people tend to struggle paying their mortgages, making their car payments, etc. Renting is a simpler, more desirable option for many people.”

Strong demand for single-family rentals pushed rents to a six-year high right before this outbreak. The CoreLogic February 2020 Single-Family Rent Index shows a 3.3% year-over-year increase in rent. (2) That’s after 21 consecutive quarters of higher rents. Markets vary in the size of the increase, however, with Phoenix at the top of that list. Rents were up 6.2% there.

CoreLogic economist Molly Boesel says, “Single-family rents were on the rise early this year, prior to the COVID-19 outbreak across the country. In the coming months, the virus’ impact on the rental market will become more apparent. Uncertainties surrounding job security and shelter-in-place mandates could lessen rental demand in the near term. However, as we look ahead to an economic recovery, consumers may begin considering single-family rentals over multi-family options to provide more space for at-home offices and distance from other housing units.”

Two Key Concerns for Landlords

Any investment comes with risk and for landlords, two key concerns are rent collection and vacancies. This pandemic has highlighted the risk of tenants losing their jobs and having a tough time paying their rent. But April rent collection has been better than expected for both multi-family and single-family landlords.

There have been hardship cases, but property managers are deploying different strategies to keep tenants in their units, and to collect the rent. Payment plans are central to most of these strategies. In our network of landlords, property managers have told us that April rent collection has been close to normal.

We are now closing in on the next round of rent payments, for May. That could produce new hardship cases, but good property management will help offset that risk. We’ve heard from some of our teams that they expect May to be about the same as April.

It helps to be proactive about communicating with tenants, to find out whether they are struggling financially, and to let them know that rent is still due. Property managers don’t want to be ruthless, but they have a responsibility to collect the rent so in times like these, creative solutions, like payment plans, are needed to help both tenants and landlords.

One advantage for investors who buy now — you can find tenants who are still employed, with less risk of a layoff. Other advantages include the potential for a deal on the purchase price, and lower interest rates if you are buying with a loan. It may be a little harder to “get” the loan however, since lenders are tightening their lending standards, and their purse strings.

As for vacancies — they haven’t been much of an issue before or during the pandemic. Harvard’s Joint Center for Housing Studies says that rental vacancies have been at their lowest point in over three decades. They were averaging about 6.8% in 2019. Right now, the benefits of having a roof over your head are obvious. Having a larger single-family home and a yard are a big bonus.

Strength of the SFR Market

ATTOM Data Solutions said in a report about 2019 that rising home prices were cutting into the single-family rental business, but it also depends on where you invest. (3) ATTOM’s chief product officer, Todd Teta, says, “From the national perspective, things are generally holding steady for landlords in the single-family home rental market.”

He also said that investors in higher-rent counties are seeing bigger gains than those in lower-rent areas. Many of those higher-rent counties are also affordable markets for investors. According to ATTOM, counties with the highest rental returns include Atlanta, Cleveland, Detroit, Chicago, Dallas, and Houston which are also some of our best investor markets.

According to John Burns Real Estate Consulting, the single-family rental market will recover more quickly than other parts of the residential real estate market, especially in areas with the fastest job recovery. Jobless claims have now hit 20 million, or about 15%, but some metros are suffering more than others. Places like Nevada and Hawaii have been hit hard because they depend on tourism, which has dried up during the pandemic. The Brookings Institute says, areas that depend on energy, tourism, leisure, and hospitality will suffer greater economic slowdowns. Those that depend more on industry, agriculture, and professional services will do better.

The president of consulting firm Bendt Enterprises told the National Real Estate Investor, “Tenant selection is likely to be key going forward looking for employment in more stable sectors such as health, government, and education.” He also believes that the use of companies that provide insurance against rent defaults will become more common, especially for those who have a mortgage on their rental properties.

Jacksonville is “Ripe for Discovery”

In September of last year, Realtor.com published a list of metros that are “ripe for discovery.” (4) These are smaller metros with at least one million people and double-digit growth. Jacksonville, Florida, topped that list. It experienced a net growth of 52% in 2019, and was ranked the fourth highest in the nation for move-ins, according to the 2020 HireAHelper American Migration Report. Jacksonville has been described as a great hybrid market that provides both cash flow and appreciation.

If you’d like to learn more about Jacksonville, and other markets with strong single-family rental performance, you’ll find free educational materials on our website. It’s free to join, membership gives you access to additional materials.

Links:

(1) National Real Estate Investor Article

(2) CoreLogic Report

(3) ATTOM Data Report

(4) Metors Ripe for Discovery: National Real Estate Investor

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