Home purchasing

What criteria do institutional buyers use before purchasing single-family rental properties?

For many years, the single-family rental market has been the preserve of small investors. Maybe only one investor owned a duplex and rented a side or owned a rental property in the same town they lived in. Owning was a way to generate passive income with the right property in the right place.

But recently, there has been a significant increase in the number of large-scale institutional investors entering the single-family rental real estate market. We will look at the reasons and criteria that these investors use to choose an investment.

Consider a new market

Institutional investment in the SFRM (single-family rental market) has exploded in just two years. In 2019, significant equity investments totaled $ 1 billion. In the first quarter of 2021, the total was $ 6.3 billion. Two major investors, Blackstone Real Estate Income Trust and Invesco Real Estate, announced deals valued at $ 11 billion in June alone.

Why this huge increase? The pandemic is one of them. People were looking to move to warmer climates where they could be outdoors for much of the year; they needed more space to work and home school their children. But the increase was already underway before the start of the pandemic. What really started this trend was the Millennials.

Millennials or millennials are those born between 1981 and 1996. Today, they are between 25 and 40 years old, what some consider the ideal age to buy a home. But the economy has never been kind to this generation. Add to that the amount of student debt they have, and home ownership is out of reach for many of them. 14.8 million Millennials have student loan debt, more than any other generation, with an average balance of $ 38,877.

But money isn’t the only thing stopping Millennials from climbing the housing ladder. Many just don’t want to own a home. They don’t want accountability; they want to live in urban areas, they marry and start families later or not at all, they don’t want to be tied to one place. And there are many. Millennials make up the largest percentage of the population, 72.26 million, even surpassing baby boomers at 70.68 million.

With these things in mind, it’s no mystery why institutional investors are keen to get into the SFRM. Many Millennials do not want to buy homes and those who do do not have the money to do so, a situation made worse by the economic fallout from the pandemic that will reverberate in the years to come.

Criteria to consider when investing in SFRMs

A good rental property is a good rental property, but the criteria that an individual investor uses to choose a property will differ in some respects from the criteria that institutional investors will use. Each buyer will have their own set of standards, and there is no single checklist; since this is a somewhat new phenomenon, the criteria are fluid. But here are some things to consider when looking for an investment:

● Travel time. While the pandemic has made working from home more common, there will still be employees who will need to be on site.

● School districts. In the past, many tenants were single or newly married couples who rented to save money in order to buy a house. These days, however, many tenants are families with children. This means that the quality of the local schools will be one of the main deciding factors when choosing a location to rent.

● Population. During the pandemic, some regions experienced drastic population declines while others experienced significant gains. Look for areas that have and continue to gain in population, as the influx of new residents will increase the demand for rental housing.

● Labor market. The country and even the states are disparate when it comes to the labor market. Buying in a city with only one main industry – auto in Detroit or hospitality in New Orleans, for example – is a gamble because if those industries plunge, so could your investment.

● Location. Some investors will buy an entire subdivision. It can work well if all of the above criteria are met. But if one or more is missing, it can be difficult to rent just one house, let alone an entire subdivision. Some investors prefer to buy one or more homes in more than one part of the country. If a place is underperforming, it can be isolated by areas that thrive.

Additional considerations

With the demographic and geographic changes occurring in the United States and the long term economic impact of the pandemic, the SFRM market is showing strong growth. The interest of large investors will help fuel this trend. If you are considering investing in SFRM as part of your investment strategy, here are some considerations to keep in mind when determining whether it is right for you.

An important element to consider is how to manage the properties in the SFRM. If a rental property is not located in a geographic location close to the investor, the investor may need to find a property management company to help with day-to-day maintenance. Fortunately, there is an entire industry devoted to “turnkey” SFRM. These management companies take care of everything from finding the right property to unblocking the sinks. Taking advantage of this type of resource means that you can own a home anywhere in the country, which will be attractive if the market in your area is overpriced or stagnant.

It is also important to keep in mind the quality of the tenants. Depending on the location and type of property you invest in, the quality of tenants may be better in an SFRM compared to multi-tenant units, which can help increase the chances of a predictable cash flow each month.

Full disclosure. The information provided here is not investment, tax or financial advice. You should consult a licensed professional for advice regarding your specific situation.


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