I'm bullish on single-family homes due to rising rents, negative real mortgage rates, undersupply, and declining vacancies. As prices soften over the next 12 months due to higher mortgage rates, I’m looking to buy more property.
I would buy another single-family homes, however, I'm tapped out because I bought a new single-family home in 2020. Further, with two young kids, I'm at my energy limit in terms of being a landlord.
Therefore, let's look at how to benefit from the single-family real estate boom without being a landlord. The following is a post from Financial Samurai partner, Fundrise.
Fundrise was founded in 2012 and is one of the leading real estate crowdfunding platforms today with over 320,000 investors and $3 billion in assets under management.
Demographics are benefitting the single-family real estate market for the next couple decades. As a result, owning single-family rentals is one of my favorite assets.
The Real Estate Boom In Single-Family Homes
Once upon a time, finding a single-family home to rent in the suburbs was pretty unusual. Families who couldn’t afford a downpayment on a home were locked out. The same for folks who weren’t ready to commit to a long-term mortgage.
No longer. One of the hottest trends to emerge out of the upheaval of the pandemic has been the rise of the single-family rental market.
We’re not talking about existing homes, leased out one at a time by small landlords. These are brand-new houses. Large home builders are now building entire communities of homes for the sole purpose of renting them out. Institutional investors are pouring billions of dollars into the sector.
And you don’t need to be a private equity investor or an overworked landlord to invest. At Fundrise, our platform offers a simple way for you to access this emerging mega-trend.
Homes are going up quickly. Tens of thousands of houses were built specifically to serve as rentals from 2020 to 2021, according to data cited by the Wall Street Journal earlier this year.
The real estate consulting firm John Burns, estimates there are more than 200 companies (including ours) in the build-for-rent business — from money managers like BlackRock and J.P. Morgan, to home builders like Lennar and LGI Homes.
Single-Family Rental Demand Is Growing
Single-family rentals are essentially a whole new asset class. And renters aren’t simply folks priced out of buying. They include millennials or empty nesters who might want to avoid the hassles of homeownership. Renters also include grandparents looking to live near their kids and city dwellers looking to dip their toe in suburban waters.
“Our renters are people who make great livings, they’re at the early stages of forming their families and what they really desire is a great school district in a great community,” one homebuilder in Scottsdale, AZ, told the Wall Street Journal in a recent article on the explosion in single-family rentals.
The rents for brand-new homes in these developments — often decked out with amenities like granite countertops and stainless steel appliances — are typically higher than they’d be if you were renting out an older home.
And rents for single-family homes are rising overall, up 6.6% from 2020, according to a recent report by CoreLogic, a real estate data firm. From 2019 to 2020, rents went up by just 1.7%. Rents are now accelerating upward in 2021.
It becomes even more clear that single-family detached houses are the hot property if you look at the difference in rent increases between detached units (standalone homes) and attached units (think townhouses): Rents rose 9.2% in detached homes, while attached single-family units grew 3.6%, according to CoreLogic.
Apartment List shows similar rent growth data for 2021 as the national vacancy index declines. Growth like this signals a major long-term opportunity.
Investing In The Real Estate Boom In The Right Locations
The hottest spots for single-family rentals in the U.S. are generally clustered in “the Sunbelt,” or what we’ve been calling the Smile States.
The Smile States is an arc that stretches from Los Angeles to Orlando. It encompasses fast-growing cities like Phoenix, Austin, and Atlanta along the way.
Single-family rental rates increased at least 4% in all 12 of the Sunbelt locations that CoreLogic surveyed as part of its recent report.
But this is a trend that predates the pandemic. These regions have been seeing their populations grow faster than the Northeast and Midwest for the past decade, according to 2020 census numbers released in August.
Phoenix was the fastest growing city in the country over the past decade, according to the Census Bureau. The city’s population rose 11.2% to 1.6 million people last year. Single-family rents went up 14% in the Phoenix metro area, according to CoreLogic’s data.
Chart source: “Domino Effect: Single-Family Rent Growth Rate Spikes in May as Housing Economy Challenges Persist, CoreLogic Reports.” CoreLogic, July 20,2021.
Overall, four of the Sunbelt metro areas had single-family rental markets with rent gains of at least 10%.
The Rental Market Is Less Volatile
The housing market surge that grew out of the pandemic is showing signs of slowing, as the rush to find more comfortable work-from-home housing is abating. We all knew double-digit year-over-year price appreciation growth forever was not sustainable.
However, the single-family rental boom continues to remain strong. Home builders are still putting up homes to rent, and the demand is there — especially with home prices so high. The irony is that the higher home prices go, the stronger the demand grows for rent.
The choice to rent a home is far less fraught than whether or not to buy. Further, the rental market has always been less prone to real estate boom bust cycles.
During the housing crash of 2008, for example, rent prices held relatively steady. If you look at rent data tracked in the Consumer Price Index, you’ll see rent prices going up and to the right in a relatively smooth line. Home purchase prices — especially during the housing crash — have been much more volatile.
This is a crucial concept for anyone thinking of real estate investing going forward. Rising rents will likely continue as household formation increases. Although the pace of rent increases has finally slowed.
Related reading: Check out my Fundrise Review
What Institutional Real Estate Investors Are Doing
It would seem like the “simple way” to take advantage of the rise in single-family rentals would be to buy a house in a Sunbelt city and rent it out.
However, how many people have the time to become a landlord, staying on top of ongoing maintenance, securing tenants, paying for insurance, etc.?
Institutional investors are already putting a lot of money into the single-family market. But many of them are actually scooping up for-sale homes, outbidding regular folks, with the intent of redeploying them on the market for renters. They’ve drawn widespread criticism for driving up home prices.
At Fundrise, we’ve focused on investing in communities that are building brand new homes. We are also acquiring existing communities that were always intended to be used for rent.
Over the past year, that has meant successfully deployment of our investors’ capital into single-family investments all across the Sunbelt.
Total single family inventory continues to remain depressed. With rising mortgage rates, expect even fewer houses to come to market as the average homeownership tenure continues to increase.
How Fundrise Is Investing In The Real Estate Cycle
By June, Fundrise had invested in the acquisition or development of 452 single-family rental units, representing roughly $79.2 million. That same month, we got financial backing from Goldman Sachs — a $300 million credit facility that will allow us to scale up our investments in single-family rentals even more.
The investment bank’s move is a signal of just how big this trend is becoming on Wall Street.
Beyond those existing investments, through a combination of new homes under contract and our development projects, we aim to scale up the portfolio to nearly 2,800 homes for lease in 12 markets over the next 20 months.
The following deployments as shown here:
Invest In The Single-Family Real Estate Cycle With Fundrise
You can get started with a Fundrise portfolio in just minutes through our new Flagship Interval Fund. It holds the majority of our single-family rental properties and was up 28% in 2021.
For decades, the main way to tap into the returns from the single-family home market was to buy a house. But given you had to live somewhere, it was hard to truly benefit unless you took out a home equity line of credit.
Fundrise returns were strong in 2022, significantly outperforming public REITs and public stocks. In addition, Fundrise returns were strong in 2018 when public REITs and public stocks fell as well. Hence, if you want to diversify your investments, consider investing in private real estate in the Sunbelt.
Today, you can invest in single-family housing without becoming a landlord or even a homeowner. If you're still saving up for a down payment, you no longer have to wait as long to participate. And if you already own a home, you can surgically invest in other single-family homes without having to take on more leverage.
It’s a powerful change. During times of uncertainty, real estate becomes an even more desirable asset class. People want to own tangible assets that provide utility, generate income, and hold its value.
Daimyo,
I am truly grateful for all of your posts. Your one step ahead of the crowd and seem to post on what is of utmost importance to me. Perhaps this is because I too am I California local who cut his teeth in mortgage financing just before and during the great recession. I’ve applied lessons learned and thrived using in state and out of state real estate investing as a passive income tool. I learn from your perspectives and I need your help.
In 2017 Memphis TN was the place. I started buying 70k homes that rented for 1150 in good neighborhoods and did great. My expense ratio (then) was around 11%. I call my “expense ratio” the amount of money I spend on repairs, maintenance and turnover costs divided by the Gross rent I collect at market rent and leased rent for all units. Today, my 10 month trailing expense ratio surged to 39% in Memphis. I’m losing money every month.
I’ve changed property managers (10 months before) and have similar lowsy results.
My expense ratio in CA for my only property is .008%. The property is the same age as the others… the difference is in California the tenants pay turnover costs and tend to leave a better home.
1031 into CA – in this market – will not yield me the Cash on Cash return needed to break even.
Is it time to sell, pay taxes and hold until a greater downturn? Am I foolish to hang on and let repair costs emaciate me? Shall I 1031 and lose money intentionally believing that CA rents and values may outperform long term… if for no other reason than I can trust my PM?
Hey Sam,
I’m wondering what your take is on the following article series by the economist. economist.com/special-report/2020/01/16/housing-is-at-the-root-of-many-of-the-rich-worlds-problems
This is just the latest I’ve read, but I’m seeing signs that policies promoting home-ownership might shift radically within the next 10 years, mainly to meet housing needs. Though I’m convinced the US might be somewhat slow to act in this area (follower instead of a leader). But without say mortgage deductions, promoting supply in various ways, and less home-owners overall what would that do to return on investment on housing? (From both an owner-resident and investor-landlord perspective).
Hi TJ – It’s behind a pay wall, so I can’t read it. You’ll have to summarize.
Homeownership will always be a part of the American dream. And since the majority of Americans own homes, the majority will not purposefully change legislation to hurt their own wealth.
While I see the monetary value in SFH investing, I just can’t bring myself to do it as I watch so many once-family-friendly neighborhoods fall into disarray because every house that gets listed is bought up by an investor.
I live in a home within 30-45 minutes of a number of ski resorts, so my neighborhood has become an investor’s dream as the houses are pretty much guaranteed to turn a profit for short-term renters. So while it’s fine and dandy that my house has gone up in value like 150% over the past 10 years, it’s less great having neighbors who have absolutely no investment in the well-being of the schools or community. It’s especially frustrating as I know many people who would LOVE to move into our neighborhood because the schools, infrastructure, and location are fantastic, but who get outbid by $10,000s over asking price by institutional investors.
I would much rather have a neighbor who I get to know over a decade than an investor who doesn’t give a rats a** what the property looks like or the behavior of the tenants as long as it doesn’t effect the bottom line.
Having neighbors who own their homes should be a good thing, as owners tend to care for what they own more than renters. However, good institutional investors hire good property managers to keep up their properties to maintain a good product.
But there are also some great renters who care as well. So I wouldn’t thumbs down renters.
Sorry your neighborhood is declining in desirability.
How do NOLs work with fundrise?
Has anyone looked into RAD Diversified? I’m curious how it compares to Fundrise, as they say they’ve cleared over a 30% return for 2020, and also the last 12 months(obviously a few month overlap in that data). I’m just wondering how they were able to achieve those returns, while Fundrise’s returns stayed in their typical ballpark.
As a small time landlord, REITS have definitely become increasingly attractive to me. Even though I only have a few rentals, they are a fair amount of work. I’m lucky enough to come from a construction background so I don’t mind changing a broken toilet out- but it’s always on a Monday morning at 6 am or some equally inconvenient time.
However this makes me nervous even though it’s not in the US.
mishtalk.com/economics/amazingly-crazy-affordable-housing-proposal-wins-in-german-election
My comments regarding Fundrise, I’m suspicious of the ownership possibly being foreign based(anti-American) and secondly the damage that the residential REIT industry is doing to family formation in America. Young people cannot compete with a institutional investor. For that matter no individual can. There is such chaos in America and the world nowadays, I think your post warranted my opinion regarding these issues and the concern that capitalism without morality is bad. Desperation for returns on investments should not encourage us to abandon what makes America great, families are a big part of that.
This mantra that the globalist of the World Economic Forum put out of “you will own nothing and like it is pure BS” when Americans own homes they care about private property laws, when one has no skin in the game some will be embracing the notion of get all the free benefits you can, making the load just that much heavier for those of us paying taxes. Working diligently and caring for your neighbor is a virtue. I think some of your readers need to hear this; especially the ones advocating FIRE and getting subsidized healthcare. I can barely stomach those comments, it’s not honorable.
After 3 years of reading Financial Samurai, this is my one and only post I’ve done, been tempted many times. I enjoy your years of investment insight.
I’m not sure how an American-founded company that employs Americans, had American shareholders and has predominantly American investors could be anti-American. But I appreciate your skepticism.
Democratizing access to commercial real estate like multi family homes and single family homes so that more people can invest and benefit is a good thing.
I think it’s good people no longer have to save for years to come up with a down payment to buy a house in order to participate in real estate’s upside. With now a $10 minimum, practically everybody can invest in a Fundrise fund now.
Are you not long real estate?
Here’s a related post: https://www.financialsamurai.com/institutional-real-estate-investors/
Keep in mind investors buying for rentals depresses the rental prices (Rental supply +1) which helps lower income folks while increasing prices for purchasers (owner supply -1) which hurts middle class. There are plus and minus’ to it. Additionally, much supply is added purely for rentals which helps both. Lastly, many landlords add significant value by improving the property and fixing things quickly that many lower income potential owners simply do not have the money to do so. Foreign investors do not tend to do nearly as well with RE as domestic for a lot of reasons and there are pluses and minuses to everything.
The single biggest factor limiting affordable housing is not even close to foreign or investors – its our city and county zoning councils (excess regulations and time delay costs) with a secondary with federal government inflationary policies causing input costs for everything to go up
I got rid of my rental properties earlier this year and got an excellent return on those.
I put the money in a Blackrock Private REIT and also bought 8 residential lots in an up and coming area of Florida. Believe it or not those lots are now closing for 100% more than what I paid just 8 months ago. Crazy market. No hassle, no fuss, no headaches, no renters refusing paying, etc etc etc.
I have had money with Blackrock for a few years. 11-13% return. Combination of distributions and NAV.
Sounds like a win to me! Difficult to deal with too many hassles.
What do you plan to do with the empty lots and how did you find the opportunity?
My brother is a broker and he works with a few independent builders. He told me about this area. Now the big boys are buying up huge amounts of land. DR Horton, Toll Bros. Timing is everything.
About the lots….Not sure what I will do.
1) Use one of the builders my brother works with and build and sell
2) Just sit on the land and sell at 3X
Cool. How much are these lots?
Do you personally have more invested with Fundrise than the value of your rental properties. If not are you planning to reallocate into them (given they offer a more hands-off approach and access to properties throughout the country)?
I do not. I have $810,000 invest in private real estate deals and more than 10X the amount invested in physical rental properties. I don’t like selling assets to buy other assets. I’d rather just keep growing the pie by investing in new assets. The nice thing about Fundrise is you can dollar-cost average in. Its returns during the 2022 bear market has been solid.
Sam, thanks for all your insights and work. I Invested in Realtyshares a number of years ago. I know you did too and were a big advocate. I’m still in the process of receiving my funds from their exit. Unfortunately, once everything winds down I will be at least at a 50% loss. I totally accept it. I took the risk. Luckily a small one, roughly 1% of my portfolio. I’m also in Fundrise, but have kept it at a 1% investment as well. I just can’t see allocating much more given my past experience with Realtyshares. How can you be so sure about Fundrise? I know you were very confident with Realtyshares.
From my experience the public REIT’s carry much less risk from complete bankruptcy vs. the crowdfunding alternatives. I know they have stock market price risk, but if you are a long term investor and choose one with a decent dividend I believe you will come out ahead with much less risk.
Thanks as always for your comments and insights.
Sorry to hear about the loss. I invested in the RS fund and there have been two zeros out of the 18 investments. But the rest are paying.
I like Fundrise because it is a highly diversified fund, way more than the RS Fund. Further, the concentration of investments are in single-family and multi-family properties in the Sunbelt.
Public REITs are more liquid, but way more volatile. The Fundrise Returns in 2018 and 2022 have been solid. Rents are still rising in the Sunbelt. Just spoke to Ben Miller, CEO, and he is buying up new investment opportunities yielding 12-14%.
Actually quite amazing that Fundrise is able to do SFH at scale. Just one SFH that I had to hire a manager to manage was a complete nightmare for me, and so for Fundrise to have been able to give nice, consistent returns on SFHs is quite impressive.
Will definitely check it out.
Thank you Sam this was really helpful! I am looking for opportunities to invest in real estate, as it is the most attractive asset class broadly speaking. I’ll give fundrise a look per your rec.
Sam, I’m sending this to you FYI about my experience with Fundrise. It is just my experience and may have changed. When I invested in the Interval Fund it was very confusing.
I believe the Flagship Fund referred to in the article is the same as the Interval Fund. The Interval Fund is my choice because it provides benefits of simpler liquidity, lower fees, and better diversification then the other ereits in the Fundrise family. It has been my choice since it was introduced in December 2020. Unfortunately, the link in the article (and past articles) to Fundrise takes you to the other ereits under the banner of Income, Balanced, and Growth. They are different than the Interval Fund in many ways. To invest in the “Flagship Interval Fund” I had to get direct help from Fundrise.
Thanks for the feedback. Will pass it a long and see if there is a specific landing page to make it easier.
Update: Here is the link to the Flagship Interval Fund. I’ve also updated the post. Thanks
I also do not see the referenced fund on the link or anywhere on their site
Just found it. Here is the link to Fundrise’s Flagship Interval Fund. I’ve updated the post.
The Flagship Fund sounds like an efficient way to invest in single-family rentals. Investing in single family homes all throughout the pandemic is paying off and should continue to pay off for years to come.
The higher home prices go, the greater the demand to rent.
I’ve got a 5 maximum rental property limit myself.
The eviction moratorium would concern me, especially as, even when this one ends, with the precedent established, the gov’t seems more likely to use it again, in future situations, and possibly for even longer periods of time.
The eviction moratorium is something to pay attention to. With the amount of liquidity looking to be put to work everywhere, I believe any most opportunities will be snapped up within two months.
So if you have the cash, I would be preparing over the next 4–6 month window as the market reaches a clearing price.
A lived in an “existing communities that were always intended to be used for rent,” for a few years almost twenty years ago. They had many nice amenities, the rent was high (but fairly so, given the place). The only issue was after a while it was clear to the tenants that the effort put into maintaining it was flagging.
I also found it hard to save for a future down payment while paying high rent and worried that this might “trap” me as a permanent renter. I ended up renting a whole house later while waiting for the (predictable) 2008 crash.
They may have been pioneers.
In CA where the gov just signed a bill where SFH can now be rezoned for multiple homes on the same lot. I got to imagine in the next few years there will be a ton of places to rent. I’m actually looking to build an ADU now. Rents will have to decline?
I tried to build an ADU in San Francisco in 2020. I decided to give up after how much time it would take and all the hoops I’d have to jump through.
It takes probably 2 years from start to finish. NOT easy, not cheap. Maybe $250,000. Department of Building Inspection is crazy inefficient, and sometimes corrupt (see news).
From The LA Times
The first, Senate Bill 9, makes it possible to build more than one housing unit on land that was previously designated for only one unit. The second, SB 10, allows for denser development near public transit corridors, such as bus and train lines.
What does that mean for a neighborhood of mostly single-family homes?
In the short term, not much. Although property owners would have new rights under SB 9, local governments still have to approve plans and building permits. As anyone who’s been through that process can attest, it can take months to pass through that gantlet.
Beyond that, a recent analysis by the Terner Center for Housing at UC Berkeley projects that only a small percentage of residential lots would see extra units as a consequence of the bill, simply because the extra construction wouldn’t make financial sense in most places. According to the center, projects would pencil out on just 5.4% of the state’s 7.5 million single-family lots.
Nevertheless, a small percentage of 7.5 million lots could still yield a lot of extra homes. The center’s analysis projected that the law would result in 714,000 new units being built statewide over the coming years, with a higher-than-average concentration in Los Angeles. What property owners ultimately decide about subdividing and building duplexes will depend on a number of factors, including local bureaucratic hurdles and construction costs.
A more important factor may be the pressure that the Legislature already has placed on local governments to build more housing. Under 2017’s SB 35, cities and counties whose land-use rules do not meet the demands of their Regional Housing Needs Assessment — a state-mandated projection of what it will take to house the growing local population — have less power to resist multiunit housing projects that bring more affordable housing to urban areas.
Matthew Lewis, communications director for the housing advocacy group California YIMBY, said it can take five years for cities and counties to update their land-use plans to match their housing needs assessments. SB 10 gives them “a release valve” for the pressure to rezone, giving them a much faster way to create areas zoned for up to 10-unit buildings, with height limits set by the local government. That could help them fend off the much larger developments that SB 35 makes possible.
Again, local governments will decide for themselves whether to adopt the denser zones that SB 10 allows for “transit rich” or urban “infill” areas. And even if they do adopt new zoning rules, each proposed development would have to go through the usual approval process.
I can totally believe there’s been an increase in demand and desire for SFH especially since the pandemic started. Families with kids want safe space for them to run around. It’s hard to believe how long playgrounds were shut down in places like SF.
Two years ago I decided to dip my toe in with Fund Rise. I cautiously put in $10,000.00. I left it alone and let it ride. I made a 10% return each year (20% return total over the time invested) and I wished I had put in a ton more.
Like most folks on this site, I am very busy growing my wealth, so this opportunity was the ideal scenario for me. There was never a phone call to fix this or that. There was just returns.
Also, my wife who is a Realtor, and I realized that we were 100% invested in equities (stocks), and the volatility was becoming a concern as we came to the conclusion that while we had both done extremely well in the stock market, we need true diversification into other asset classes.
Homes in our area (Metro DC) have skyrocketed to the point that buying them as investments made no sense as the market keeps peaking. This can’t go on forever. One side effect that doesn’t seem to be discussed is that there are no foreclosures now as if you get into financial trouble, you can easily sell your house in a week with a bidding war or the banks will gladly take your house back as they can sell it and make a profit. But you still need a roof over your head. So single family rental is the result.
While no investment or asset class is perfect, this one is very close in my opinion as I do not have the landlord headaches.
Further, Fundrise is headquartered here in DC and they have made investments here locally. Someone commented that the platform was confusing. It’s true that getting to know the platform will require you to make a time commitment, but what doesn’t require that in investing? Their staff is awesome to deal with.
Just my two cents- As events on the worlds stage (that are totally out of our control) seem to be getting more and more volatile, this gives some stability.
God bless.
I actually invested $810,000 in real estate crowdfunding by 2017 and wished I had invested even more. But it felt dicey in 2020. However, distributions have roared back.
Fundrise now has $2.5B in assets under management and over 210,000 investors.
At this moment, it is actually the ideal environment for real estate investors.
That’s awesome Sam. I am re-allocating / re-balancing my investable assets to get a better mix of diversification, and more passive income and more compounding.
Investing is a lifelong activity. It is not a sprint, but a marathon. Look at Buffett still going strong at 90+ years of age. He (and Ben Graham) are the GOAT’s.
Thanks again for all you do.