What Criteria Do Institutional Buyers Use Before Purchasing Single-Family Rental Properties?

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

But recently, there has been a significant upswing in large-scale institutional investors jumping into the single-family rental property market. We’ll look at the reasons and the criteria these investors are using to choose an investment.

Considering a New Market

Institutional investment in the SFRM (single-family rental market) has exploded in just two short 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 vast increase? The pandemic is part of it. People were looking to move to warmer climates where they could be outside for more of the year; they needed more space to work and school their children from home. But the increase was already underway before the pandemic began. What really started this trend was Millennials.

Millennials or Generation Y are those born between 1981 and 1996. Right now, they range in age from 25 to 40—what some consider the prime ages to buy a home. But the economy has never been kind to this generation. Couple that with the amount of student loan debt they have, and homeownership 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 onto the housing ladder. Many simply don’t want to own a home. They don’t want the responsibility; 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 location. And there are a lot of them. Millennials make up the biggest percentage of the population, 72.26 million, edging out even Baby Boomers at 70.68 million.

With those things in mind, it’s no mystery why institutional investors are eager to enter the SFRM. Many Millenials don’t want to buy homes and those who do, don’t have the money to do so, a situation made worse by the economic fallout of the pandemic which is going to reverberate for years to come.

Criteria to Consider When Investing in SFRMs

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

●  Commute time. While the pandemic made working from home more common, there will always be employees who have to be on location.

●  School districts. In the past, many renters were singles or newly married couples renting to save up to buy a home. These days though, many renters are families with children. That means the quality of the local schools will be one of the primary deciding factors when choosing a location to rent in.

●  Population. During the pandemic, some areas saw drastic decreases in population while others saw significant gains. Look for those areas that have and continue to gain population as the influx of new residents will hike demand for rental homes.

●  Job market. The country and even states are disparate when it comes to the job market. Buying in a city with just one primary industry--automotive in Detroit or hospitality in New Orleans, for example--is a gamble because if those industries take a nosedive, your investment could too.

●  Location. Some investors will buy up an entire subdivision. That can work out well if all of the above criteria are met. But if one or more are lacking, it could be hard to rent just one home, never mind a whole subdivision of them. Some investors prefer to buy a single or a few houses in several different areas of the country. If one place is underperforming, it can be insulated by the areas that are thriving.

Additional Considerations

With the demographic and geographical shifts happening in the U.S. and the long-term economic impact of the pandemic, the SFRM market is showing strong growth. The interest from large-scale investors will help drive this trend. If you are considering investing in the SFRM as part of your investment strategy, here are some considerations to keep in mind when determining if it is the right fit for you.

One important item to consider is how to manage properties in the SFRM. If a rental property isn’t located in a geographical location in close proximity to the investor, the investor may need to find a property management company to assist with day-to-day maintenance. Thankfully, there is an entire industry devoted to “turnkey” SFRM. These management companies handle everything from finding the right property to unclogging sinks. Leveraging this kind of resource means you can own a home anywhere in the country, something that will be attractive if the market in your area is too expensive or stagnant.

It’s also important to keep in mind tenant quality. Depending on the location and type of property you invest in, the quality of renters may be better in a SFRM compared to multi-tenant units, which may 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 with a licensed professional for advice concerning your specific situation.