While investors placing their money and
hopes on single family houses is not a new phenomenon, CoreLogic in its current
issue of MarketPulse, says it was an
important one in the successful recovery of the housing market. What was different about single family
investment post-recession was the "aggregation and professional management of
large portfolios of properties and, most importantly, the availability of institutional
investor capital to fund the acquisition of properties."
CoreLogic's chief economist Mark Fleming,
in an article titled Slow Money is Replacing Fast Money, asks "Where
would prices be today if investors had not been willing to buy distressed properties
in the dark days of the housing market just a few years ago?" But now he says the market is changing.
The maturation of the market combined
with rising home prices is challenging the profitability of large scale
single-family investment. To demonstrate
this Fleming computed rental cap rates for a number of markets where this type
of investment was a significant activity in both 2012 and 2013 using August-over-August
rates as that month signals the end of the home-buying season.
Fleming used market-level single-family
rental rates, assumed one-month's vacancy, one month's leasing costs, an 8
percent management fee and 2 percent maintenance. Acquisition cost was based on the average
single-family sales prices discounted 30 percent under the assumption it was a
distressed sale and assuming a 5 percent cost to rehab.
Out of the 10 markets Fleming examined eight
had declining cap rates with only Charlotte, North Carolina and Houston increasing. The declines,
Fleming said, were largely due to the increase in home prices outpacing any
increases in rents. Nonetheless, the
implied return he said is still strong, especially if one factors in capital
appreciation from rising home prices.
Fleming spoke with investors attending a
first-of-its-kind REO-to-Rental Forum held recently in Arizona and found
participants had a positive attitude toward continuing this asset class for
long-term rental cash flow even aside from any capital appreciation. He found them talking continually about how
to select the right properties, buy them at the right price, and to find
operational management efficiency and gain economies of scale.
Fleming says that as the single-family
residential rental asset class matures, the "slow money," i.e. investing for
extended income return, is replacing the "fast money" and that this is a good
sign for the long-term success of this asset class.