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The projected risk-adjusted annual rate of return on single-family homes built to rent is about 8 percent, the best investment performance among 18 real estate sectors, according to real estate advisory service Green Street.
Soaring home prices and required large cash down payments have squeezed families out of the home-buying market that would have qualified for mortgages in pre-COVID times (see related story in this issue).
However, those households are still eager to live in stand-alone houses with yards, making rental houses the star performer among real estate investments.
“The cost of housing alternatives for single-family renters has exploded,” Green Street analyst John Powlowski told The Wall Street Journal.
Almost 100,000 built-to-rent single-family houses have begun construction this year, according to Hunter Housing Economics, drawing about $30 billion in capital so far, with billions more committed to future projects, company founder Brad Hunter said.
Blackstone and other private equity firms have been among the sector’s largest investors, often buying up entire tracts of houses before construction has begun, as we have detailed in articles such as “Blackstone Extends Reach Into Housing Market” (29 Jun 2021) and “Invitation Homes to Buy $1 Billion Worth of Houses This Year” (1 Jun 2021).
However, the investment boom in stand-alone houses might be seeding its own demise, the WSJ noted, with the breakneck pace of building the houses risking a glut, especially in favored markets such as Phoenix and other Sunbelt locales.
TREND FORECAST: Private equity companies and others buying houses as investments are doing so because they can charge premium rents.
When the economy turns dark again, fewer households will be able to pay the premium rents these landlords charge.
At that point, rather than settle for smaller returns, equity companies will put houses up for sale in the least profitable locations, opening the door—although perhaps just slightly—to more families who might be able to afford a mortgage and claim the keys to homes of their own.