The recent exodus of investors from the single-family rental market isn’t a mystery – it’s simply a matter of numbers. According to Reventure Consulting CEO Nick Gerli, the math is straightforward: with the 10-year Treasury currently yielding 4.0%, it’s outperforming the typical 4.9% cap rate generated by single-family rentals. This narrow 0.9% spread represents a significant shift from the period between 2011 and 2022, where the gap averaged around 3.0% and peaked at 4.4% in 2020. “Everyone likes to think there’s some big conspiracy about investors buying homes or not buying homes,” Gerli shared on X (formerly Twitter). “There isn’t. It’s just math.”
Data from Redfin confirms this investor pullback, highlighting a dramatic decline in purchase volumes over the past two years. The current interest rate environment offers little incentive for capital deployment, as the 4.9% cap rate typically results in negative returns after accounting for debt service costs.
Gerli identifies two potential catalysts for investor return: either a drop in 10-year Treasury yields below 3.0% or an increase in cap rates above 6.0%. However, achieving higher cap rates would require steep price declines, as national rent growth remains modest at 2-3% annually, with some markets even experiencing decreases.
This shift in investor activity aligns with broader market trends outlined in ATTOM’s third-quarter 2024 U.S. Home Sales Report. Homeowner profit margins have slipped to 55.6%, a decline of one percentage point from the previous quarter and two points year-over-year. This marks a continuation of the gradual descent from the peak of 64% in 2022. “The latest price and profit numbers provided another round of generally good news for homeowners, tempered by a bit of a downside,” said Rob Barber, CEO of ATTOM. “Home values remained at or near record levels around large swaths of the country, keeping seller profits far above historical levels.”
For investors seeking more lucrative yields, Gerli points to opportunities in Southeast markets, specifically in Alabama, Georgia, and South Carolina. These regions offer unlevered returns of 7-8%, often benefitting from lower insurance and property tax rates, making them more competitive.
The institutional investment landscape mirrors this trend. ATTOM reports that institutional buyers accounted for 6% of single-family home and condo sales in the third quarter of 2024, down from 6.2% in the previous quarter and 6.6% year-over-year. The highest institutional activity was concentrated in Alabama (9.1%), Tennessee (8.9%), and Oklahoma (8.4%).
Looking ahead, experts like Gerli emphasize that changes in either interest rates or property values will likely be necessary to restore the risk-adjusted returns that previously attracted widespread investor interest in residential real estate.