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Deciding Where to Invest in the SFR Market

For Rent Three BHThe cost of rent remains elevated in some markets around the country; in markets like Boston, Miami, Washington, D.C., San Francisco, and parts of New York City, rent for a two-bedroom home exceeds $3,000 per month, according to a report from Trulia last week. Some recent reports have even suggested that high rents are forcing renters to become homeowners, or at least to consider buying a home.

In the last decade as the single-family rental market has experienced explosive growth as an asset class, SFR investors have not noticed any slowing down in demand for rental housing amid the high rents in some markets. But with rents sky high in some markets and lower in others, how does an SFR investor choose where to invest? Does it pay to go for the markets where the rent is high?

“Typically (New York, Miami, and San Francisco) are markets with higher home prices,” said Tim Herriage, CEO of 2020 REI Investment Companies. “I think there's a correlation between the price of housing, whether it be to purchase or to rent. That is why you look for markets like Dallas, Atlanta, Charlotte, and Jacksonville. These markets offer a relatively low home price, coupled with strong rental demand.”

Greg Rand, CEO of OwnAmerica, added, “Increases in rents are benefiting owners of SFR for all the obvious reasons. We see strong activity in many of markets where rents are rising, but some have not been touched by the SFR industry. The New York Metro Area is a notable example. Taxes and prices are just too high to produce a decent yield.”

“There is a new wave of SFR investment that is bringing with it a diversity of strategy.”

Greg Rand, CEO, OwnAmerica

Some investors are branching out into niche product types in order to grow their investment portfolios, according to Rand. The strategy depends on the goal of the investor.

“There is a new wave of SFR investment that is bringing with it a diversity of strategy,” Rand said. “Niche product types, like vacation rentals. Markets with more modest yields in return for stronger price appreciation. The professionalism of the institutional SFR industry is opening the asset class up to more investors at all levels, and some have different investment goals. Capital preservation and liquidity, for example.”
With more than 15 years of experience in the SFR market, Herriage says he focuses on economic fundamentals when it comes to deciding where to invest. “I have always focused on jobs and schools as the main driver for my investment decisions,” he said. “Chasing high rents, without understanding the important underlying fundamentals: leads to poor investment decisions.”

“I think there's a correlation between the price of housing, whether it be to purchase or to rent.”

Tim Herriage, CEO, 2020 REI Investment

The markets targeted by the larger institutional investors have done well by and large, with many of the markets having gone up nearly 30 percent from the beginning of their aggregation phase, according to Herriage. This is not representative of the mass market, however.

“Those that live in markets where achieving an acceptable gross yield is not probable tend to invest out-of-state but not in markets where rents are high,” Herriage said. “I see them investing in places like Ohio in Indianapolis. Here for a $60,000 house you can get $800 a month rent.”

This strategy, however, is a “cash flow play,” according to Herriage; he said, “If you can find a market, like Dallas, that has good job growth, good schools, and middle-of-the-road, you, the drivers of the reinvestment will turn out much better over the test of time.”

Editor’s note: The Second Annual Five Star Single-Family Rental Summit will be November 1-3 in Frisco, Texas. The Five Star Institute is the parent company of DS News and DSNews.com.

About Author: Brian Honea

Brian Honea's writing and editing career spans nearly two decades across many forms of media. He served as sports editor for two suburban newspaper chains in the DFW area and has freelanced for such publications as the Yahoo! Contributor Network, Dallas Home Improvement magazine, and the Dallas Morning News. He has written four non-fiction sports books, the latest of which, The Life of Coach Chuck Curtis, was published by the TCU Press in December 2014. A lifelong Texan, Brian received his master's degree from Amberton University in Garland.
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