Single family residential ("SFR") investing: an overview

We shy away from real estate jargon and insider-only abbreviations, but here’s a term worth knowing: SFR. SFR stands for “single family residential” and refers to single family homes that are rented out to tenants.

Something like this:

SFR has been having a moment. A big one.

Rising from the Ashes

The SFR real estate business arose from the ashes of the 2008/2009 financial crisis, when vulture investors were able to buy single family suburban spec homes in large quantities at deep discounts. At the time, private equity firms invested in single family homes, buying enormous portfolios of these SFR assets. Then in 2017, Blackstone completed an IPO of its 48,000-unit portfolio (in a company called Invitation Homes) at a valuation of more than $12 billion. (Blackstone had spent about $9.6 billion to buy and renovate the homes, which netted a $2.7 billion gain for its investors.)

After watching Blackstone’s victory with envy, the rest of the real estate investment industry raced to copy the strategy in the hopes of achieving massive returns. Today, most large real estate investors have a strategy, team and capital allocation for SFR real estate investing. Approximately $33 billion of SFR assets are currently owned by institutional real estate investors, but some estimates peg the total single family home market at $28 trillion, which leaves plenty of room for growth. (Professional investors account for only 2% of all US single family home and condominium sales.)

That’s why real estate investors and venture capitalists are watching the sector so carefully. As SFR investment becomes mainstream, a cohort of technology and service providers are being built to service this young, but fast-growing ecosystem.

SFR Real Estate Strategy

Real estate investors who invest in single family rental properties, generally speaking, are more focused on rental income to generate investment returns. With SFRs, cash flow is king, and historically, SFRs have commanded high rents. Think about it: most people are willing to pay up for their own spaces, backyards, and garages, so these higher rents yield more income potential, which is reflected in greater cash flow. What’s more, SFR rents have consistently increased year over year.

And while suburban homes in the midwest and sunbelt may generate more current rental income — they tend to sell at higher cap rates than single-family homes and condominiums in major coastal cities — they tend not to appreciate as much or as quickly as properties in their urban counterparts. As a reminder, a cap rate is a metric used to determine the potential return on investment, based on dividing the net operating income (or NOI) by the current market value of the asset. 

Urban SFR

We also believe there is a compelling market opportunity in residential real estate in major American cities. And we’re not alone in thinking so. In 2018, 11% of Manhattan condos sold became investor-held rentals, and we see the same thing playing out in cities like San Francisco, Los Angeles, Chicago, Washington DC, Boston, Austin, and Nashville.

This real estate opportunity, which we’re coining “Urban SFR,” combines the benefits of a traditional SFR real estate strategy with the upside of investing in major cities that have greater potential for long term price appreciation. 

SFR Stats

Don’t want to feel like a herb when all your friends are gushing about SFR real estate? Below are some industry highlights so that you can very casually drop the phrase “SFR” into your next conversation with total confidence—let them know you’re a pro real estate investor.

• Total Single Family Homes in the US: 80,000,000+

• Top County with the Greatest Single Family Rental Returns: Baltimore-Columbia-Towson, MD

• Best SFR Growth Markets: Detroit, Cleveland, Milwaukee, and Memphis Memphis

Publicly-traded SFR Companies:

The SFR real estate sector also has its own index, Hoya Capital Single Family Rental Index, but it only tracks the three stocks (INVH, AMH & RESI) which account for approximately $25 billion in market value.

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This educational article is provided by Republic to help its users understand this area of the market, it should not be construed as investment advice as it is impersonal, disinterested and was produced by Republic for Republic’s users, without remuneration received or expected.