Why Invest in Single-Family Rentals?

Single-family rentals (SFR) and build-to-rent (BTR) investments have attracted a lot of attention in recent years, with even large REITs buying in.

If conventional wisdom says multifamily properties cash flow better, why would single-family rentals make sense? Just like trading up from a reliable old sedan to a sports car, conventional wisdom says to move up to large multifamily properties for higher returns compared to single-family rentals.

But improvements in property management technology, along with stronger demand, have changed the dynamics of SFR, creating a “new” asset class where it used to be too slow of a performer.

Build-to-rent (BTR) assets are similar — fee-simple communities of single-family or townhomes on separately deeded lots, built specifically to lease as an entire community. Being purpose-built eliminates a lot of the friction seen in rental townhome communities with owner-occupants, since many newer communities limit the number of rentals to preserve access to government-backed loan programs (VA, FHA, Fannie, Freddie). Building with the intent to lease also improves management efficiency, leading to greater interest from investors.

Here’s an overview of the benefits of SFR and BTR that have attracted institutional buyers to this market.

1. Lower Turnover: Renters often choose a house precisely because they intend to stay a while for the amenities and neighborhood. According to Invitation Homes CEO Dallas Tanner, tenants in single-family rentals renew their lease 75-80% of the time. With an average rental cycle of three years, that’s attractive compared to the revolving door seen in larger multifamily complexes, which average closer to 50% renewal.
2. Higher Demand: Lifestyle changes and a growing preference for renting have expanded the pool of renters in this space, creating significant demand upside. Younger workers are more mobile and often move for work or lifestyle reasons, and many may not want to commit to purchasing a home if they anticipate moving within a few years. With busier lives and more dual-income households, having the time to maintain and pay for repairs on a home has become less desirable, increasing the appeal of renting where a manager handles upkeep and expenses.
3. Faster Rent Growth: Because of these higher demand drivers, forecasts show single-family rent growth outpacing apartment rent growth over the next several years. Many apartment units have come to market, but because of the higher cost to build SFR, supply is more limited — and higher demand paired with limited supply means higher pricing.
4. Higher Appreciation: Single-family homes generally appreciate faster than the rent increases that drive multifamily value gains. Rents in the US have risen by an average of 3.3% over the past 20 years, while home appreciation has averaged 5.4%, compared to inflation averaging 2.46% over the same period.
5. Similar Cost Ratios: In the past, a single-family rental portfolio was more expensive and cumbersome to manage. But in the age of property tech that automates many functions, management efficiency has increased, and property costs are now much closer in line with multifamily.
6. Exit Strategy Flexibility: Multiple exit strategies — selling to either an investor or an owner-occupant — act as a risk diversifier, making SFR an attractive, risk-adjusted option for serious investors.

Investing in SFR and BTR can be an excellent way to diversify if you appreciate a property class that holds its own over the long term, with room for continued reinvention.