Institutional Investors Buy SF Rentals, In Spite of High Prices

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Article originally posted on National Real Estate Investor on September 12, 2016

Despite rising prices, institutional investors continue to buy single-family rentals.

“Investors are willing to accept much smaller returns,” says Steve Hovland, director of research for HomeUnion, a real estate investment management firm. “A volatile stock market has made investor wary. Single-family rental housing is much more attractive than other options.”

The share of single-family homes bought by investors stopped shrinking in 2016, after getting smaller for years. Investors have also begun to buy single-family rental houses from each other, as companies and individuals that specialize in managing single-family rentals take over from investors who seized the opportunity to buy underpriced houses earlier in the recovery.

The biggest and smallest investors remain

“There will be a handful of entities that will stay in the single-family rental business for the long-term,” says Daren Blomquist, vice president for data firm RealtyTrac. “They will look to buy portfolios from tired investors.”

So far this year, institutional investors have bought more single-family homes than in 2015. In the first half of 2016, institutional investors bought 2.9 percent of all of the single-family homes bought and sold in the U.S. That’s up from 2.6 percent in 2015, according to RealtyTrac, which identifies an “institutional investor” as an entity that buys more than 10 rental houses a year.

It’s a new direction for investors in single-family rentals, who burst into the housing market during the early years of recovery from the housing crash, buying 9.4 percent of all the homes bought and sold in 2013. They subsequently cut back on their buying as home prices rose.

The smallest investors in single-family rentals might also become more prominent in the industry. These individuals often own a few properties apiece and have always owned the majority of rental homes. “This is going to return to the small investors, who buy one, two or three properties a year,” says Blomquist.

Meanwhile, investors are paying more for single-family homes, Blomquist notes. Prices for single-family rentals have been rising more quickly than the rents, driving down the yields investors receive from their assets. There are now 45 markets where the average cap rate on a single-family rental is less than 6.0 percent. That’s up from 45 markets in 2015, out of the more than 400 counties tracked by RealtyTrac.

“Anything over 6.0 percent is a market you should at least consider. Below 6.0 percent, if you are going after cash flow, you are going to want to avoid that market,” says Blomquist.

However, some investors can make lower cap rates work. “I am selling a 141-unit portfolio in Phoenix now. Every one of the properties is selling at below a 6.0 percent cap rate,” says Greg Rand, CEO of OwnAmerica, a brokerage company that specializes in single-familyassets. All of those houses are occupied with rental tenants.

A new set of property brokers, including OwnAmerica, now arrange transactions to buy and sell single-family home rentals. That’s a big change. In the past, most residential brokers would not attempt to sell a single-family house with a renter living in it. “When someone wants to sell 25 houses, the broker usually says: ‘Great. Just make sure the homes are vacant and ready to sell,’” according to Rand.

Investors can save a lot of money by selling tenant-occupied single-family rentals. The ‘friction cost’ of asking rental tenants to move out, fixing up the house and then leasing the house again after a sale can equal 8.0 percent to 12.0 percent of the cost of the properties, according to Rand. The old way of doing business also hurts the tenants. “These are customers who you are supposed to care about,” say Rand.

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