Before housing prices skyrocketed, earning some extra money by buying a single-family home and becoming a landlord was attainable to those who saved enough to buy a rental property, or at least make the down payment on one. That world is fading, and fast.

Some of the blame goes to the COVID-19 lockdowns, which tended to hurt small businesses more than large corporations backed by lots of capital.  In fact, as many small businesses closed their doors during the pandemic, plenty of large corporations flourished, making more profit than before the outbreak. The biggest winners, based on gains in market capitalization, were:

  1. Apple 
  2. Amazon 
  3. Tesla 
  4. Alphabet (Google) 
  5. Tencent Holdings (China's largest internet company) 
Adults and children in a neighborhood.

Image source: Getty Images.

Investing in single-family home REITs

The mom-and-pop landlord business is no different. The reaction to the pandemic accelerated the rise of institutional investors in a niche once ruled by small, local buyers. Before the pandemic, almost half of all rental units in America were properties with one to four units, according to a June 2020 report from the U.S Department of Housing and Urban Development and the U.S. Census Bureau. This includes single-family homes, duplexes, triplexes, and quadplexes. Individual investors owned most (nearly 73%) of these types of rental properties. That report was based on pre-pandemic 2018 numbers, and the individual ownership rate probably has declined since then.  

So rather than trying to keep up with the institutional investors as they shoulder their way into this sector of the rental-housing market, a better way to go in this climate might be to join them.

The single-family housing companies

It is true that for folks interested in becoming a single-family landlord, it's still possible to do so by buying property and renting it out. But it's getting tougher these days because of several factors: reduced housing supply, more demand, higher prices and more competition from institutional buyers. But there's a fairly new vehicle in the market that offers investors another option: real estate investment trusts that focus on single-family homes.

The largest of these single-family home REITs, a type of business that by law must distribute 90% of its taxable income as dividends, is Invitation Homes (NYSE:INVH), followed by American Homes 4 Rent (NYSE:AMH). Todd Kellenberger, a client portfolio manager at Principal, told Citywire that  "the REIT model is the right model" for investing in single-family homes. He added that money is flowing into this sector and has been picking up.

Another reason to invest in single-family home REITs is that this asset class is still in the beginning stages. There are about 17 million single-family home rentals, and less than 2% are institutionally owned. 

Build-to-rent is another newer category

Besides buying existing single-family homes to use as rental properties, institutional investors are joining with builders such as Pulte (NYSE:PHM) and Lennar (NYSE:LEN) to invest in a newer category of homes called build-to-rent, which is one of the fastest growing sectors of the U.S. housing market, according to Builder

Land is acquired for the purpose of building new single-family home communities slated to be rental-only housing. This comes at a time when many millennials, ready for a home in which to raise a family, are priced out of the housing market because of student-loan debt and rising home prices.

Renting is getting more appealing

Many of those potential renters prefer living in a single-family house, typically in the suburbs, and in a setting more suited to family life than an apartment. Investing in REITs in the single-family home sector could be the way to go if you can't or don't want to buy actual properties. Indeed, single-family home REITs have been reporting almost perfect rent collection and high occupancy rates.

 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.