Single-family rentals are an often overlooked but growing market for K&B Remodeling.
By Robert Isler
Single-family rentals (SFR’s) represent a significant out-of-the-box remodeling opportunity. Occupancy rates for this segment continue to increase, bringing with it more investment money for upgrades.
SFR’s are detached houses, often found in suburban neighborhoods. They have delivered solid returns for investors, even during recessionary periods. Most are run by larger groups. Typically, the investor leverages and manages multiple properties with relatively little money down for each, then collects a reliable and steady rental income. The concept has shown particular strength in today’s housing market, which is characterized by a scarcity of home-buying opportunities. Tenants who choose this rental route tend to stay longer and have more of a stake in the property. Since this is a period of strong home-price appreciation, investor-owners can charge higher rents and are encouraged to make renovations to increase the appeal of each property.
Single-family rentals are one of the hottest markets for renovation, with a projected $5.5 billion expected to be spent this year on remodeling in the K&B segment.
Currently, according to NKBA’s recent update to its 2021 Kitchen & Bath Market Outlook, 8% of all K&B spending this year — or $5.5 billion —is on renovations for single-family rental properties, with 68% of it on improvements to existing properties, the remainder on upgrades for newly acquired ones. About $3.5 billion of this spending is designated for kitchen renovation, with the remainder for bathrooms. That 8% share is likely to increase in the near term, based on current housing trends. The number of SFR rental units have increased by 3.8 million since 2001 and now total over 15 million.
After acquiring SFR’s, the next step for players in this field is often a value-added upgrade, with operators negotiating discounts with suppliers for common items across their properties. As one operator noted, “We typically incur costs between $15,000 and $30,000 to renovate a home to prepare it for rental. Renovations may include paint, flooring, cabinetry and appliances.”
Another spoke of a process where there’s an initial assessment to evaluate the potential returns on value-added upgrades that can enhance rental demand and rates. For existing properties, targeted renovations are continuously analyzed to address changing lifestyle preferences of potential renters. For instance, as one operator said, “Our homes embrace a work-from-home lifestyle and offer greater size and relative affordability compared with other residential alternatives.”
The SFR trend is not relegated to any particular region. Growth of 7%+ this year can be found in as wide-ranging markets as Phoenix, Boston, Atlanta, Philadelphia, Austin and Minneapolis. Coming out of lockdown, it is an attractive alternative as consumers prioritize safety, control and additional living space for now. In a first-quarter survey, 49% of owners in this segment said they expect leasing demand to be much stronger for the next six months. When asked the same question in 2020, only 3% felt that way. Some 66% of SFR operators are reporting higher occupancy rates in Q1 2021 than a year ago. Just 42% shared that thought in the first quarter of 2020. These better returns bode well for the K&B industry, since higher demand means higher rents — and as such, operators presumably will have more money to spend on remodeling.