The Rise of Single-Family Rentals

[Account Closed]

People are trading homeownership for rental properties in large scores.

For the last decade the number of renter households has been on the rise. A Housing Vacancy Survey found that between 2005 and 2015, the market experienced its largest 10-year increase since 1965 with 9 million households entering the rental market, bringing the total number of renters to 42.6 million.

The demand for rental properties is being driven by a number of factors. A sluggish market for new home construction has resulted in a dearth of affordable starter homes. Young people who are traditionally the most active homebuyers are delaying marriage, kids and mortgages . And many Americans are still dealing with the fallout of the housing crisis and have been forced into the rental market while they repair their credit.

But the boon to the rental market is also being marked by a shift in societal attitudes. Many people, especially aging Baby Boomers, no longer want to be saddled down by the responsibilities of owning a home and are finding an appreciation for the latitude offered by renting.

This trend towards renting shows no signs of slowing down. A recent renting study showed that it expects the homeownership rate in the U.S. to continue to decline for at least the next 15 years, which will cause a sustained surge in the demand for rentals.

As consumer demand for rentals soars, it begs the question, how will the market manage to keep up?

Even as multifamily construction continues to skyrocket, apartment buildings are not able to shoulder the demand on their own. For one, the protracted timeline for completion on these properties is being outpaced by the growing rental population. And much of the new apartment construction has been luxury, which is not a fit for the many mid-market renters.

So, at an increasing rate, single-family homes are absorbing the large pool of people who are in the rental market. A new real estate report in October found that more than 18 million non-owner occupied single-family homes, or one in four single-family homes, is a rental property. This notion is further corroborated by a government study, which showed that 52.4 percent of renters ages 25 to 34 lived in single-family homes, compared with 43.4 percent in apartments.

That said, it is a good time to invest in single-family homes as rentals and those that do could be rewarded handsomely. As demand for rentals has ticked upwards, rents have increased 20 percent nationwide over the last five years. It was noted in one study that the average annual gross rental yield for single-family homes dropped slightly from 8.8 percent to 8.7 percent year-over-year, they still offer attractive returns as compared to other investment opportunities. By most accounts, experts expect that single-family rental investors will be a driving force in the real estate market for many years to come.

In the years following the Great Recession the real estate market has been rescripted. Homeownership that had once been the cornerstone of the American dream has fallen into the background as many consumers opt to rent - whether out of necessity or preference. And while home buying is nary a thing of the past, many investors may find that renting single-family homes rather than selling them might offer the best returns.

For those investors eager to get in on the action, several studies identified the strongest markets for buying single-family rentals in the first seven months of 2016. It focused in on markets that demonstrated high gross annual rental yields as well as areas marked by low owner-occupancy rates, which can signal a strong demand for rental properties.

1. Clayton County, Georgia in the Atlanta metro area - 24.3 percent annual gross rental yield

2. Baltimore City, Maryland - 22.8 percent annual gross rental yield

3. Wayne County, Michigan in the Detroit metro area - 18.5 percent annual gross rental yield

4. Bibb County, Georgia in the Macon metro area - 17.7 percent annual gross rental yield

5. Bay County, Michigan in the Bay City metro area - 17.6 percent annual gross rental yield