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.