Is There A Growing Single-Family Rental "Hedge Fund" Crisis? Maybe...

How much money are different hedge funds pouring into the single-family residential real estate market today?  Why are they buying up so many properties and what are they doing with them?  These are two big questions for every day real estate investors who are worried about their ability to make a living in their markets.  Given that real estate investors themselves are spending $9 billion a year as estimated by the BiggerPockets/Memphis Invest Investor Survey from the fall of 2012, I would say investors and the media may be asking the wrong questions.  The right questions revolve around what the renters being served by this growing asset class are looking for and what are their plans for the future?  Without knowing the answers to these questions, we could all be feeding into a single-family renter crisis in the futre.

How Big Can The Residential Rental Market Grow?

So the estimates on the size and amount of money that hedge funds are willing to grow and spend acquiring and holding properties varies.  I recently heard that all of the known funds combined would be well over $30 billion in announced capital that they expect to deploy.  For the moment, I’m not interested in calculating the exact number of houses that will purchase and where those properties might be.  I am much more interested in combining that number with the expected $10 billion plus that small companies and individual investors will buy this year.  Knowing that only a fraction of those, but still a significant number, will remain as rentals, there is a size-able investment being made by every one involved in converting single-family homes into rentals. During one five year period, 2005 to 2010, the total U.S. number of single-family housing units grew by 4 percent.  

Obviously housing was down and many economists say that housing starts have fallen so far behind population growth that it will take years to fully recover.  I think I will save that point for a question at the end as well.  For now, let’s look at what has happened with single-family homes converting from home ownership to rental. During the same five year period from 2005 to 2010, the share of single-family homes that converted from home ownership to rental grew by 21 percent.  Clearly the number of homes being built did not keep up with rental demand which means that over 3 million homes that were built originally to be occupied by a home owner have since converted to rentals.  This has led to single-family homes making up 52 percent of the rental units in America today.  

Considering that multi-family building often house many more occupants, single-family renters still only make up 27 percent of the total renter number, but this is a growing number and could have a significant impact on the future of housing.  After all, this is the portion of the population that many economists say the U.S. economy is counting on purchasing a significant number of homes in the next few years as they are expected to transition back to home owners.  So here is the question...Will they?

What Is On The Minds Of Single-Family Renters?

Recently, our company wanted to undertake a survey and develop an on-going study to find out what is on the minds of single-family renters.  We could have taken on the survey ourselves and simply surveyed the renters of the single-family homes that we have under management in Tennessee and Texas.  That seemed like a small and obviously biased way to go about a survey.  Instead, we contracted with ORC International, Opinion Research Corporation, one of the most respected Caravan survey companies in the world and an expert at conducting a Caravan phone survey.  What transpired and eventually was published just last week is the National Survey of Renters.  

We wanted them to design a survey that reached both landline and cell phone recipients and asked them to self-identify first as a renter and second to distinguish as single-family home or a multi-family unit renter.  Once the respondents had been classified, ORC proceeded to ask questions that were designed to help us start figuring out what renters were looking for and what were their future plans. What came out was a surprising picture.  Single-family renters tend to place a higher value on safety, cleanliness and friendliness of the area as well as schools and less on access to parks, recreation and community centers.  They also tend to be more affluent than multi-family renters and are more apt to have children.  The data showed that single-family home renters tend to be a little older.  I think most of that data could have been guessed by many experienced investors.  But there were some surprises. Some 84 percent of the single-family renters gave their property management company or landlord good to exceptional ratings.  Only 5 percent rated their property management as poor.  Multi-family renters were slightly less satisfied with their rental management and quite a few rated the management as poor.  

Even though single-family renters are satisfied with property management, nearly 60 percent plan to move within the next two years.  That seems fairly in line with what many believe is a transient community with high turnover rates.  However, 26 percent planned to stay longer than 5 years in their current location.  With these mixed messages we started to question what the data was showing us and  that brought us to the real reason for conducting the survey and study in the first place.

What are the Future Plans of Single-Family Renters?

There has been a common theme in recent months that if it were only easier to obtain financing, more single-family renters would buy houses.  I think I agree with that notion in principle.  I know I agree with the idea that if there were an ease of lending to promote more purchases by real estate investors, that group would absolutely buy more homes.  The past investor survey showed as much.  But, we were surprised to look at one narrow group in the survey and read their responses.  

The survey showed that only 52 percent of renters, including 60 percent of single-family renters plan on becoming home owners in the next five years. When they were asked why they were not planning to buy a home in the next five years, only 29 percent said it was due to difficulties obtaining a loan.  That response completely turns the notion of making credit more accessible will spur single-family renters to become home buyers on its head.  Will it lead to more home sales?  Absolutely.  We saw that in 2009-2012 with the home buyers credit.  Anytime steps are taken to entice home sales, a certain uptick in activity can be measured.  But  the uptick is always fleeting and only a response to the program.  What about when there is no program?   Interest rates continue to be at all time lows so why are more renters not coming forward or planning on coming forward to buy a home? Fully 75 percent of single-family renters in the survey reported that they either enjoy renting or simply have no desire to own a home.  Given the turmoil of the past few years does anyone find that hard to believe?   

The ranks of single-family home renters have undoubtedly grown as more and more families have lost their homes to financial hardship and foreclosures.  Yet, these families have grown accustomed to the benefits of living in a neighborhood.  They would like to maintain a semblance of normalcy.  And, looking back, they have no desire to go through the grind of becoming a home owner again.

More Questions...More Answers?

So back to some of the earlier questions.  What do you think this means?  Who is really in a better situation right now...the large fund investor or the small individual investor?  If you are buying for long-term buy and hold, I personally like the position of the individual investor if only for their ability to keep a closer and more focused eye on the management and performance of each property.  The funds will be just fine and most will come out either packaging their portfolios into REITs or selling them to other investment groups looking for a cash flow package.  

But, the fact that many are not able to figure out the management aspect of owning such a large portfolio and considering that many funds have failed to come to grips with the fact that owning single-family rentals cannot be simply boiled down to an algorithmic formula for success, leads me to believe that not knowing what renters want and not providing good management could lead to some funds holding onto properties without a clear exit strategy.  You cannot simply "expect" and "prepare" for higher costs and think that somehow a new calculation is going to make a portfolio perform better.  It may help a fund to hit a bottom line return, which is really where their concern lies.  I do not blame them for a minute.  They are telling people exactly why they are doing this.  But the properties themselves and the experience of the renter will be much lower than the average every day investor who is keeping a close watch on his or her portfolio and the management piece of the equation. 

What about multi-family building?  Many areas of the country are experiencing growth in this category while also seeing a huge transfer of single-family homes from owners to renters.  Can both exist and grow at the same time?  And what do you make of the fact that we are still millions of homes behind what economists tell us we should be building to keep up with population growth and demand?  I believe that we are close to hitting a tipping point where demand for rental property and demand for ownership property will not meet the supply on the streets.  For some communities that is going to mean a new set of misery. The next five years are going to be very telling for all of us as investors.  There will absolutely be a continued transfer of property wealth.  For all of us, watching renter sentiment and providing what renters are asking for could have a tremendous pay off.  Premier Property Management will continue to run this twice a year survey to maybe stay in front of the next trend and hopefully provide a few answers along the way. 

sources used to compile the data in this post: 

2010 U.S. Census Data 

Secrets of Single Family Rentals 

SFR: Birth of a Category 

WSJ: Report: Single-Family Rental Demand Is Outstripping Supply 

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