\n<\/p>\n
The single-family rental (SFR) sector<\/a> and its close cousin, the fix-and-flip market<\/a>, are now essentially treading water in an environment of high interest rates<\/a>, approaching 8%; high home prices; and a dearth of home-purchase inventory<\/a>.<\/p>\n Still, even in this difficult-to-agonizing supply-challenged housing market, SFR and fix-and-flip investors, which both target existing-home inventory, are still finding ways to make a profit \u2014 at a thin margin in most cases, but a profit, nonetheless. That\u2019s particularly true for mom-and-pop investors<\/a> across both market segments. <\/p>\n Companies and individual investors in the SFR sector focus on purchasing existing single-family homes or building them for rent. Fix-and-flip investors \u2014 who tend to be smaller entrepreneurial players \u2014 acquire, renovate and then sell existing single-family homes \u2014 and, in some cases, hold them for rent for a time, depending on market conditions.<\/p>\n Experts in both those housing-market sectors say smaller investors are leading the charge now in an inventory-depressed market, in part, because they have a more flexible return-on-investment threshold.<\/p>\n \u201cOur data shows that home flipping activity around the United States dropped during the second quarter of 2023,\u201d said Rob Barber, CEO of real estate analytics firm ATTOM<\/strong>. \u201c\u2026 At the same time, profit margins on typical home flips jumped almost 5 percentage points, from about 22.9% in first quarter to 27.5% in the second quarter. <\/p>\n \u201c\u2026 The latest investment return (ROI) for home flips certainly isn’t great, [however]. It remained way below the 44.6% level from the second quarter of 2022 and far beneath a recent peak of 60.8% hit in the second quarter of 2021.\u201d<\/p>\n Barber added that, unfortunately, the current profit-margin mark \u201ccould easily be wiped out by flipping carrying costs \u2014 mainly mortgage payments, renovation costs and property taxes.\u201d That reality appears to have helped convert more than a few fix-and-flippers to the role of short-term landlords in the SFR market.<\/p>\n Although the home-flipping rate (flips as a percentage of overall home sales) dropped quarter over quarter during the first half of 2023, the actual number of home flips was up slightly over that period, according to ATTOM\u2019s data<\/a>. Total home flips jumped slightly from 82,180 in the first quarter of this year to 84,350 in the second quarter. Over the same period last year, ATTOM\u2019s data show, total flips came in at about 130,000 per quarter.<\/p>\n Another real estate-analytics firm, CoreLogic<\/strong>, issued a report<\/a> in August that tracked investor home purchases in the SFR space in the second quarter of this year. It shows that home purchases by these investors declined by 90,000 year over year. CoreLogic defines an investor as an individual or corporate entity that has retained three or more properties at the same time within the past decade.<\/p>\n \u201cThroughout Q2 2023, large [100 to 900 properties] and mega-investors [1,000 or more properties] showed muted activity,\u201d the CoreLogic report states. \u201cIn April, May and June [of this year], large and mega-investors each made between 7,000 and 9,000 purchases per month [or a total of 21,000 to 27,000 in each category, which translates to a market share of between 8% to 10% each month].<\/p>\n \u201c\u2026 In the case of mega-investors, this is a drastic decline from the high of 17% of all investor purchases recorded in June 2022. \u2026 Small investors [three to nine properties] made 38,000, 46,000 and 38,000 purchases [122,000 total] in April, May and June [2023], respectively.\u201d<\/p>\n The CoreLogic report also notes that SFR investors are now more likely to be smaller players, operating three to nine properties. In June, the report states that this group \u201caccounted for 47% of investor purchases, the highest level since 2011.\u201d Still, the CoreLogic report notes, that even among the small investor group, purchase activity in the second quarter of this year represents \u201ca big drop from 2021 and 2022.\u201d<\/p>\n \u201cInventory levels continue to be constrained, partially because many owners are unwilling to sell and give up the low interest rates that current borrowers secured by refinancing during the pandemic,\u201d the report continues. \u201cThis trend could potentially be behind the rise of small investor activity [in the SFR sector] in recent months, as members of this group may have chosen to rent their properties rather than sell.\u201d<\/p>\n Longer hold times for fix-and-flip investors also may be contributing to the rise of mom-and-pop rentals as well.<\/p>\n Arvind Mohan, CEO of fix and flip lender Kiavi<\/a><\/strong>, said his company\u2019s data shows that in 2019, just prior to the pandemic, 45% to 50% of homes purchased by fix-and-flip investors were sold within six months of the purchase date. Last year, that figure decreased<\/a> to 33% \u2014 but jumped up to 42% as of the first quarter of this year.<\/p>\n \u201cOne of the inferences is that \u2026 flippers are holding onto properties for longer time,\u201d Mohan said. \u201cSo, it\u2019s rented out [as an SFR] or to take advantage of further HPA [home price appreciation].\u201d<\/p>\n Other datapoints paint a picture of SFR and fix-and-flip sectors that remain active and opportunistic, but with deal-flow at much lower levels than last year due to high rates and low housing inventory. Sector leaders are predicting more of the same for 2024. <\/p>\n Brandon Lwowski<\/a>, senior director of research at HouseCanary<\/strong><\/a>, a proptech<\/a> firm that provides institutional investors<\/a>, lenders and other clients with residential real estate analysis, said there are some 75 mega-SFR companies nationwide, those operating more than 1,000 single-family rentals \u2014 a figure that he said has remained fairly constant over the past three or four years. <\/p>\n Lwowski added, however, that HouseCanary\u2019s data shows a big shift in the mid-sized SFR market segment (those controlling 50 to 99 SFR properties), whose numbers have dwindled from around 700 in 2021 to fewer than 300 this year.<\/p>\n L.D. Salmanson, CEO of Cherre<\/strong>, a leading real estate data-integration<\/a> and analytics platform with a focus on the SFR market, said the largest SFR players \u2014 institutional investors that now control between 3% to 5% of the SFR market \u2014 this year have shifted their strategy away from buying homes on the open market and toward build-for-rent<\/a> (BFR) opportunities. <\/p>\n The National Association of Home Builders<\/strong><\/a> estimates that 69,000 BFR homes started construction last year, up 33% year over year. That estimate includes only homes built by builders and held for rent. It excludes homes sold to another entity to be rented, which the industry group estimates may add another 5% or more single-family home starts to the total.<\/p>\n \u201cThey [large institutional SFR entities controlling thousands of rentals] are so thirsty for supply, they’re not only buying what’s on the market,\u201d Salmanson said. \u201cThey’re buying future [new-home] supply [from builders], so they’re locking up future demand as well.\u201d<\/p>\n He added that smaller SFR players \u2014 those with 10 or fewer properties \u2014 control 80% or more of the SFR market. At the top of the market, however, he said the largest players are buying out SFR companies in the mid-range of the market \u2014 which helps to explain HouseCanary\u2019s data showing a reduction in mid-sized SFR operators over the past few years.<\/p>\n \u201cA big strategy we see right now [for the largest institutional SFR players] is portfolio acquisitions,\u201d Salmanson said. \u201cSo, anything between 100 and 250, or even 50 to 250 [SFR units], those are the prime portfolio [targets].\u201d<\/p>\n Although the SFR market is essentially treading water now until market conditions improve and are more favorable for the sector, Salmanson remains bullish on its future long-term prospects due to market dynamics that favor renting over buying for many individuals and families.<\/p>\n \u201cOut of the 110 million to 115 million or so [existing] single-family homes in the US, somewhere between 15 million to 16 million are SFRs,\u201d he said. \u201cThat’s [SFR number is] going to double by the end of this decade\u2026.\u201d<\/p>\n Fred Matera, chief investment officer at Redwood Trust<\/a><\/strong>, which operates CoreVest<\/strong>, a division focused on providing business-purpose loans for investment-property purchases, said the \u201csmaller and middle market sector of the [SFR\/fix-and-flip] industry has historically been a core client base for us at CoreVest.\u201d<\/p>\n \u201cThese smaller investors generally have lower return targets for their equity than the larger institutions, who are much more influenced by the global increase in [investment] return bogeys for equity investors that the market has experienced over the last 12 to 18 months,\u201d he added. \u201cThis helps to explain why individuals and smaller investors are able to pay more for a home and tolerate a lower return than an institutional investor, at least in this current market created by the monetary-policy tightening.\u201d<\/p>\n The rise of the mom-and-pop investors, then, is being propelled by their ability to tolerate tight profit margins \u2014 as inflation continues to bump up costs while strong home prices still make it possible for them to still eke out a narrow return on investment.<\/p>\n \u201cToday, there are more financing alternatives available to these investors than there have been previously, which certainly facilitates the ability for mom-and-pops to purchase investment properties,\u201d Matera added. \u201cIn particular, we are witnessing this trend in terms of the demand we are seeing for our DSCR [debt-service coverage ratio] product, \u2026 [which is] designed for these types of investors.\u201d<\/p>\n Still, even for the mom-and-pops, the low levels of housing inventory in play are making for a difficult operating environment. As evidence, the number of private-label securitization<\/a> (PLS) deals involving DSCR loans<\/a> as part of the collateral pools [typically up to about half of the loans by count] is down considerably this year so far, compared to 2022. <\/p>\n PLS data provided by Kroll Bond Rating Agency<\/strong> shows that year to date as of mid-October, there were some 49 PLS deals valued at $18.6 billion involving DSCR loan collateral. That compares with 90 deals last year over the same period valued at $35.1 billion. <\/p>\n The securitization picture for largest institutional investors this year is even more bleak, however, with only three PLS deals issued through mid-October. Those securitizations were valued at $1.1 billion and involved collateral pools with a total of 4,346 properties. That compares with 13 deals in 2022 valued at $9.1 billion involving collateral pools with a total of 30,247 properties, KBRA data shows. (Of course, not all properties purchased by institutional investors are securitized, although securitization is a major liquidity outlet for the class.)<\/p>\n \u201cYou know, we’ve got a million houses on the market right now,\u201d said Kurt Carlton, co-founder and president of New Western<\/strong><\/a>, a national private real-estate investment marketplace serving some 150,000 investors.<\/a> \u201cIn 2006, we had 4 million houses on the market, so there\u2019s just a tremendous lack of inventory. <\/p>\nShifting market dynamics <\/h2>\n
Rise of the mom and pops<\/h2>\n