SFR stands for “single-family rental” and refers to single-family homes that are rented out to tenants.

At Compound, we see a very compelling opportunity taking shape in residential real estate in major American cities. We call it “Urban SFR”:  city apartments that are owned and operated as traditional rentals.

We’re not alone in thinking so.  Last year, 11% of the Manhattan condos sold became investor-held rentals, and we see the same trend playing out in cities like Miami, San Francisco, Los Angeles, Chicago, Washington DC, Boston, Austin, and Nashville.

Today, Miami and New York City have an oversupply of condos and not enough buyers, which makes it a buyer’s market in both places. Meanwhile, cities like Austin, Nashville, Boston and Los Angeles have strong job and population growth trends and offer interesting condo investment opportunities as well.

Unlike traditional SFR investment, urban SFR does not throw off lots of current income. These properties trade like Apple stock: low dividend yields but strong capital appreciation potential.  For example, the median price of a Manhattan condominium has increased by more than 400% since 1997.

Even the publicly-traded traditional SFR companies pay fairly low dividend yields. For example, Invitation Homes is paying a 1.72% dividend yield. Today, Manhattan and Miami condos offer the same returns--with a lot more upside.

A Brief History of the SFR Industry

The SFR business arose from the ashes of the 2008/2009 financial crisis, when vulture investors were able to buy suburban spec homes in large quantities at deep discounts. At the time, private equity firms bought enormous portfolios of these SFR assets. Then in 2017, Blackstone completed the 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 tidy $2.7 billion gain for its investors.)

After watching Blackstone’s victory enviously, the rest of the real estate investment industry raced to copy the strategy. Today, most large real estate investors have a strategy, team and capital allocation for SFR. Approximately $33 billion of SFR assets are currently owned by institutions, 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.)

Suburban homes in the midwest and sunbelt generate more current income than single-family homes and condominiums in major coastal cities (because they tend to sell at higher cap rates), but they also tend not to appreciate as much or as quickly.