The single-family rental market is hot right now, as home prices continue to rise and work-from-home options have created more demand for backyards and extra space in the suburbs. According to CoreLogic’s Single-Family Rent Index, single-family rent growth accelerated this spring, with average rents up 4.3% in March. The strong rental market, along with uncertainty in other investment options, has lured more large investors into the single-family rental market. Some of these investors are taking advantage of new technology, including iBuyer technology, to snap up rental properties quickly.
Investors are a Growing Share of the Single-Family Rental Market
A new report by Redfin shows that investors spent $77 billion on homes in the past six months and the number of homes acquired by investors increased significantly in the first quarter of 2021. Investors are heavily invested in single-family homes, which made up the biggest share of investor purchases. About 39,000 of the 55,000 investor-acquired homes in the first quarter were single-family properties, about 70% of investor purchases.
With continued economic uncertainty and ups and downs in the stock market, residential real estate, and particularly single-family housing, is a relatively safe and profitable opportunity for investors.
IBuyers are a New Segment of the Single-Family Rental Market
New technology has resulted in new practices designed to make it quicker to buy and sell a home. Investors purchasing single-family rental properties include iBuyers such as Opendoor, which purchased more than 3,500 single-family rental homes in the first quarter, along with Offerpad and Zillow. IBuyers (shorthand for “instant buyers”) are companies that purchase homes from homeowners via quick cash transactions. These companies use computer algorithms to estimate a property’s worth which they use to make an offer. IBuyers tend to offer homeowners less than they would get with a traditional sale. but they can reduce the time and hassle of selling a home.
Investors and other cash purchasers of single-family homes are increasingly using iBuying technology, competing with traditional buyers. However, iBuyers still make up a tiny share of the overall market. Nationally, iBuyers purchased less than one percent of homes sold. That share has increased slightly over the past few months, but it is still a minor part of the market.
As the iBuying technology advances and investors continue to look for ways to enter the profitable single-family rental market, it is likely that more purchases will be made this way in the future. For the iBuyer companies, selling to investors is a growth area and is likely a place those companies will look to as they expand.
IBuyers are a Niche Part of the Single-Family Rental Market… But Pay Attention
Institutional investors play a very small role in the single-family rental housing market. Traditionally, big investors have been much more involved in apartments and other multifamily housing properties, and there has not been as much interest in single-family homes. The strong demand and better-than-average return on investment has drawn more investors to single-family rentals, but in most local markets, their reach remains small.
Even though small, a growing number of institutional investors could put further pressure on an already tight housing market. Single-family investors, including those working with iBuyer companies, can make it harder for traditional buyers who have to compete with their cash offers and fast timelines.
As the economy improves and a broader set of investment options becomes available, some investors will shift from single-family rentals to other assets. However, while demand is high and inventory is tight, the single-family rental market will continue to be a draw.
Furthermore, the use of iBuying technology, while growing, has remained a tiny share of the market, as sellers are able to achieve competitive bids often from multiple buyers, making the higher fees and lower offers iBuyers typically present less attractive. These iBuying companies will remain in the market, however, and may constitute a growing share of market activity when the overall housing market begins to return to more normal conditions.
Click here to send any comments or questions about this piece to Virginia REALTORS® Chief Economist Lisa Sturtevant, PhD.