U.S. Economic Outlook: May 2018

Total Return on Single-family Rental Investments - Over last 5 years, single-family rental earned a 9 percent annual return

By Frank Nothaft Housing Policy, Real Estate

Total return is an important financial concept to compare alternative investments.  The overall return on an investment generally reflects the income earned and the change in the asset value over time.  For example, for common stock these reflect the dividend payment and the change in share price.  To compare the return of different stocks, one needs to look at both the dividend income and capital gain.

A similar concept applies for comparing the return on investment for different real estate parcels.  For rental properties, the net operating income reflects rental income less operating expenses.  And the ‘capital gain’ is the increase in the property’s value after netting out structural additions and renovations.

Single-family rental total return

One-family rental houses, either detached or attached, have grown from 11.3 million in 2006 to 15.3 million in 2016, or from 17 percent to 23 percent of the one-family occupied stock. We used CoreLogic’s Home Price Index and Single-Family Rental Index with Census Bureau survey data to estimate the income, capital, and total return for single-family rental since 2004.[i] (Figure 1)  We estimated that the income return was 3 percent, capital return 5 percent, and the total return about 8 percent during 2017 for single-family rental.

We can compare this with a similar calculation for apartment buildings reported by the National Council of Real Estate Investment Fiduciaries. (Figure 2) They reported an income return of 4 percent, capital return of 2 percent, and a total return of 6 percent during 2017 for multifamily rental.

Total Return Comparison by Property

Because returns can vary a lot year-to-year and real estate investors generally own properties for multiple years, it’s important to compare annual returns over time.  Looking over the last five years, the annual total return for single-family rental has averaged 9 percent per year, the same as for apartment buildings and similar to the return for nonresidential properties.  Thus, investors in single-family rental during the last five years have earned a return that has been comparable to that for other real estate investments.

[i] The Census Bureau’s 2015 Rental Housing Finance Survey collected data on property value, rental income, operating expenses, and capital improvements.  The net income return was estimated at about 3.5 percent for 2014, and capital improvement data suggested about a 1 percent increase in value per year. The CoreLogic Single-family Rental Index was used to estimate net income before and after 2014; this calculation assumes that both rental income and operating expense grew at the same rate.  The CoreLogic HPI for the U.S. was used to change property value before and after 2014 for both the income and capital returns. 

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