A Bullish Market for Single-Family-Home Rentals

single-family

By Cynthia Badiey, Editor, Auction.com Blog

Fix and flip? Or buy and hold? It’s one of the biggest—and most basic—decisions that residential real estate investors have to make. Knowing what’s going on in the market for single-family homes can make the choice easier.

What’s the outlook right now for single-family rental market?

The single-family rental market is growing, and will probably continue to grow over the next few years. There are a few reasons for this. First, household formations are finally beginning to increase, and a higher–than-usual percentage of those new households are renting rather than buying homes. Many families who were homeowners before losing their homes during the housing market meltdown would now prefer to rent a house rather than an apartment because it suits their lifestyle better.

At the same time, there isn’t a lot of vacant rental inventory: across the country, the occupancy rates are already at a record 96–97%. New inventory is under construction, but even with that, it’s unlikely that supply will keep up with demand. This presents a tremendous opportunity for investors to buy and rent out single-family homes as rental units, at least for the next few years.

Is it true that big institutional investors are starting to exit the space?

These stories are starting to remind me of the rumors of Mark Twain’s death: they are greatly exaggerated. It’s true that Blackstone, which has been by far the biggest purchaser of single-family rental homes, has backed off significantly. Others, such as Colony Capital and Waypoint Homes, have scaled back. But companies like American Homes 4 Rent continue to be active buyers.

Institutional investors are also staying active by offering loan products to the individual and mid-sized investors buying single-family rental properties. Blackstone, Colony and Cerberus have all launched businesses aimed at providing this kind of financing.

As the large players scale back, this has opened the door for a new category of buyers—I call them “super-regionals”—who aren’t as big as the larger hedge funds, but are still of significant size. These investors typically put together portfolios of several hundred, or even several thousand, homes in a relatively concentrated geographic area.

What geographic shifts, if any, are you seeing in the market?

The single-family rental boom started in the “sand states”—markets like Phoenix, Las Vegas, and Southern California. These regions were the hardest-hit during the housing market bust, which is why they became favorites among investors early on. Home prices represented great values, and properties purchased at below-market prices could be rented out profitably, and the homes could eventually be sold off at a profit after prices appreciated.

But the heightened investor activity accelerated price growth much more rapidly than anticipated, and made it difficult for the larger institutions to buy homes in these areas at prices that would produce decent returns. As a result, we’ve seen institutional investors moving their focus to Southeastern states like Florida, the Carolinas, and Georgia, as well as Midwestern states like Illinois, Indiana, and Michigan. Investors are finding that they can buy reasonably priced properties in these regions and rent them out at rates that allow them to make the returns they need.

How are the business models changing? Are investors making their returns on appreciation or cash flow?

The earliest participants in the single-family rental investment space had models that built in a high percentage of profits from eventual home price appreciation, with modest returns on monthly rent payments. Business models today are less reliant on home price appreciation, and more dependent on profit from monthly rental cash flow.

We’re also seeing dramatic changes in financing. The institutional investors are financing debt, issuing securities, and forming public real estate investment trusts (REITs). All of these strategies add leverage, which allows these companies to acquire more assets. It also indicates that these investors are pursuing a longer-term buy-and-hold strategy, since securities and REITs are built on the cash flow from the underlying assets. (In fact, REITs are regulated in a way that requires holding a certain percentage of the properties.)

The ratings agencies tend to penalize the funds if they have vacancies, so we’re seeing institutional investors move away from buying vacant properties that need repairs to buying more “stabilized” properties with tenants in place.

So the single-family-home rental segment is really starting to feel and behave like a new asset class, with the kinds of evolution and corrections that you’d expect in the early stages.

What are the opportunities for personal investors in markets where institutional investors are still very active?

Many smart individual investors are turning institutional and super-regional investors into their customers! These individuals know much more about a given market than someone from out of town, so the larger investors retain them to scout out the best properties. Sometimes the local investor acts as a buying agent for the larger investor; we see this happen quite a bit at our foreclosure auctions.

Another trend is that individual investors—along with small-to-mid-sized investment companies—are flipping properties to the larger investors. We’re also seeing investors who have small, stabilized portfolios selling them off to larger players looking for occupied, revenue-producing properties in various markets.

In what ways does an online auction platform like Auction.com support individual investors?

We provide a transparent, open marketplace where investors can find and buy properties that meet their investment criteria. There are generally between 15,000–20,000 properties listed on Auction.com. Investors will also find property information, valuations, products and services on the website to help them successfully navigate the process.

For investors who buy multiple properties in a given year, we offer complimentary membership in our VIP program, which offers free research reports, more support, and at certain levels, a personal account representative who will find and recommend properties that meet the investor’s criteria, and help with bidding on and acquiring assets.

Last but not least, we recently entered into an agreement with Colony American Finance to provide financing for investors looking to purchase single-family rental units.

The bottom line is that investors who lean toward the single-family market shouldn’t shy away from it because they’re not interested in “fixing and flipping.” If you’re looking for a steady source of monthly income, this could be a good time to become a landlord.

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