Last week’s initial public offering by the real estate investment trust American Homes 4 Rent, which captured $706 million, raises more questions than answers about the long-term viability of the single-family rental home market.

That IPO, whose haul was significantly under the $1.25 billion projection the Agoura Hills, Calif.-based company made in its original prospectus, came at a time when some investors have cooled on the other publicly traded companies in this sector, American Residential Properties and Silver Bay Realty Trust Co.

The Wall Street Journal reported late last month that two single-family rental home providers, Waypoint Homes and Colony American Homes, have put their plans to go public on hold. (A spokesperson for Waypoint declined to comment for MFE’s article, and Colony did not return calls from MFE requesting comment.)

Even the Federal Housing Finance Agency—whose Real Estate Owned Pilot Initiative, launched two years ago, has transferred 1,763 REO properties to new owners—seems ambivalent about future demand. “We continue to examine the evolving market dynamics in this asset class,” said Prasant Sar, a senior policy analyst for FHFA’s housing policy brand, in an e-mail to MFE. “We have not made any determination about next steps at this time.”

None of this surprises Eric Workman. As vice president of sales and marketing for Mack Companies, a single-family rental home landlord serving the Chicago area, Workman and his company are in the thick of the ongoing debate within the industry about whether single-family rental is a trade or a business, and whether the REIT structure is a way of consistently raising capital or an exit strategy.

“Companies like ours, which have been around for 16 years, prove that this is a business, and that it is possible to scale that business across the United States,” says Workman. “But it takes time, because this is not a ‘get in, get out’ kind of business.”

There are about 14 million single-family rental homes in the U.S., according to real estate consultant John Burns. Some analysts say there’s about $15 billion in institutional capital in place in this sector. But the single-family rental market remains highly fragmented: Investor-financed companies control only between 120,000 and 150,000 of the total number of homes available.

“It’s still in its very early stages,” says American Residential Properties’ president Laurie Hawkes, about the single-family rental arena. Lucas Halderman, chief information and marketing officer for Beazer Pre-Owned Rental Homes, sees this market as being in its “awkward teenager phase. Everyone is waiting for it to grow up.”

Both executives cite parallels between today’s single-family rental market and the multifamily rental sector of the 1990s whose growth and investment potential were questioned by many. Hawkes asserts there is “far greater” inventory potential in single-family rental than multifamily has had “on a good day.”

The caveat, though, is that supply and demand for rental homes vary markedly around the country, even by ZIP code in the same market. “There’s no one market analysis, it’s all micro,” says Hawkes.

Technology Drives Property Management
Much has been written in recent years about the shift towards renting rather than owning, especially among younger, more mobile Americans. That’s gotten some homebuilders thinking about including rentals in their product mixes.

Garbett Homes in Utah is a prime example. Last year it closed 125 for-sale homes and 165 for-rent homes, many of which were single family. The builder’s president and CEO, Bryson Garbett, expects his company to close 150 for-sale and 250 for-rent houses in 2013. He notes that Garbett Homes recently completed a 175-townhouse project that was the first for-rent solar community in the state. At another solar-powered community, 95 of the 174 rental homes are detached.

The rental market’s potential notwithstanding, challenges to success abound. “The money just flows in and tenants always pay on time,” jokes Mike Kalis, managing director for Marketplace Homes, a 10-year-old Michigan-based company that is helping more than 80 home builders sell new houses by offering buyers guaranteed monthly lease payments for up to six years on their existing homes.

Marketplace is currently renting about 1,500 houses in 20 states, primarily in Michigan, Ohio, Illinois, and Georgia. It recently expanded into Minneapolis and St. Louis. And its occupancy rates—a sore spot for some providers—are in the high 90 percent range.

However, Marketplace also has $400,000 in judgments against tenants that Kalis says it has been unable to collect. And in markets like Atlanta, where “a lot of people are converting homes to rentals,” Kalis says Marketplace struggles to fill its rental properties. (In all its markets, the company’s fill rate averages about 40 days after Marketplace starts managing the property.)

Unlike Marketplace, which takes over properties that, for the most part, are in rentable shape, the homes that Mack Companies buys are almost uniformly “uninhabitable,” says Workman. He notes that Illinois is a judicial state where the foreclosure cycle takes, on average, 500 days, during which a house sits exposed to the elements without heat, electricity, or maintenance.

Mack has 140 employees and subcontractors on construction crews that can get a property into rentable condition within six to eight weeks. “We’re doing redevelopments, not just repairs, by replicating the production builder model,” explains Workman. (Indeed, Mack Companies has become a reliable supplier of rental homes to American Residential Properties, which has made bulk buys over the past several months and intends to purchase at least 1,000 more homes from Mack through the end of 2014.)

Mack has eight people managing its single-family properties, double the personnel it would use to manage the same number of multifamily rental units. The managers’ primary goal, says Workman, “is to generate relationships with tenants.” Each manager visits the homes he or she oversees at least once a month, during which rents are collected and sites inspected. If anything needs repairing, “our first response is to get it fixed,” says Workman, and then figure out liability.

Mobile, updatable technology is at the core of property management for American Residential, with 4,000 rental units in 12 states; and Beazer Pre-Owned Rental Homes, with 1,200 single-family rentals in four states. Hawkes notes that her company brought that management in-house after discovering, to its disappointment, that using third-party property management providers had “quality and cost issues.” She adds that managing single-family rentals requires a “tight” rent collection system, a regional and local presence, and “a well-vetted and trained” network of suppliers.

Beazer’s home-building background has been particularly helpful in maintaining its rental properties and cultivating a subcontractor base in each of its markets. “That resonates with our tenants,” says Halderman.

Lots of Runway Ahead
Just where the single-family rental market is headed is still anyone’s guess. Some larger players have been accused by competitors of acquiring every house they can get their hands on, regardless of quality. Other providers are traveling a more discerning path. Beazer, for one, is executing a branding strategy by confining its purchases to homes that were mostly built after 2000, require little renovation, have pretty much the same design style and are located within homeowner association communities.

Hawkes sees plenty of growth opportunity for well-capitalized landlords that can bring professional management to the rental experience. She is also buoyed by the fact that the supply of single-family rental homes in the U.S. is still “widely outpacing” the investment capital that’s come into this market. American Residential’s “sweet spot” financially, she says, is in rental houses 1,500 to 2,100 square feet in size that can command monthly rents of between $900 and $1,200.

Workman says single-family rental opportunities continue to flourish in Chicagoland, too. “We have a significant amount of inventory in front of us.” In that market, Mack competes with Waypoint, American Homes 4 Rent, and Blackstone Group, whose 32,000 rental properties nationwide make it the biggest player in this sector. Each competitor has staked out a different area of Chicago, with Mack targeting the market’s southern suburbs where it fetches rents of between $1,350 and $1,700 per month. “We strive to create the highest-quality home in the market because that’s what the high-quality tenant expects,” says Workman.

John Caulfield is senior editor with MFE’s sister publication Builder