Patient Money Enters Single-Family Rental Market

For the past several years, institutional investors and REITs have dominated the single-family rental market. However, industry experts expect these investors to take a step back, making room for super-regional players.

“The investment opportunity that single-family rentals offer today is more attractive to investors with patient money – those who have an investment horizon of more than three-to-five years and are focused on making their return on monthly rental income rather than property appreciation,” says Rick Sharga, executive vice president of Auction.com.  

Auction.com sold 35,000 single-family homes last year and is on track to sell 50,000 this year, according to Sharga. The company entered the single-family residential market at the peak of the foreclosure crisis when a number of large financial institutions relied on Auction.com to sell off pools of assets. Initially most of the properties purchased as rental units by investors were REO, but Sharga says the properties selling today include both  foreclosures and traditional homes listed on the MLS.

Although most properties trade individually, Auction.com recently began to offer investors the ability to select multiple properties in a single auction and bid on the entire lot. The majority of buyers continue to be individual investors rather than institutions, but Sharga says regional operators and institutional investors continue to gain a foothold in the industry.

Institutional investors transform market

Single-family homes have always made up a significant portion of the rental housing stock, but the recent increase is remarkable. Today, there are roughly 15 million single-family rentals in the U.S., and the American Community Survey reports that the number of single-family homes rented from 2006 to 2012 increased by 3.2 million, roughly twice the number of new apartments added, pushing the single-family share of all rentals from 30 percent in 2006 to 34 percent in 2012.

Historically, mom-and-pop investors dominated the single-family rental market. But the housing bust enticed institutional players into the space. Starting as early as 2008, smaller private equity firms like Waypoint in California and American Residential Homes in Arizona entered the market.

Private equity behemoth Blackstone jumped into the single-family rental market in 2009, buying up properties at distressed prices. In 2012, the firm launched Invitation Homes, which owns and leases single family homes in 14 regions across the country. Dallas-based Invitation Homes has purchased more than 44,000 houses since its inception.

In addition to Blackstone, other large private equity firms Colony Capital and KKR entered the single-family rental market, along with firms that eventually established single-family rental REITs. Silver Bay Realty Trust was the first single-family operator to go public as a REIT, raising $245 million with its IPO in 2012. Since then, American Homes 4 Rent, American Residential Properties have gone public, along with Starwood Waypoint Residential Trust, a publicly traded, single-family residential REIT that was spun off by Starwood Property Trust and Waypoint Real Estate Group in late 2013.

While precise numbers are hard to come by, estimates suggest these institutional investors have amassed more than 200,000 single-family units from 2012 through early 2014. Investors accounted for almost a fifth (19 percent) of home sales from 2010 to 2013, according to the National Association of Realtors. And recent research from the Federal Reserve suggests that business investors buying three or more homes accounted for 6.5 percent of home sales in 2012, up from less than 1 percent in 2004.

Sector provides strong returns

For the past few years, the business model of many investors was to buy the property at less-than-market value, rent it for a few years while the market recovers, and then sell it at a high profit margin when home prices appreciated. Strong investor demand forced prices higher than expected, sooner than anticipated, Sharga notes.

Median prices on existing homes rose 10 percent between year-end 2012 and year-end 2013, according to a recent State of the Nation’s Housing report produced by Harvard University. This year, appreciation has slowed, and typically prices rise 3.5 percent annually, according to Zillow.

RealtyTrac’s analysis of 586 counties found that investors buying U.S. residential rental property in the third quarter 2014 achieved an average annual return of 9.06 percent, down from an average annual return of 9.65 percent for the third quarter 2013.

Median home prices in the 586 counties analyzed in the report increased more than 7 percent on average in the third quarter of 2014 compared to a year ago, while average fair market rents for three-bedroom homes increased an average of less than 1 percent.

“The single family rental market is still strong, with returns averaging 9 percent in the 586 counties analyzed,” said Daren Blomquist, vice president at RealtyTrac. “Even so, the market is softening, with those same 586 counties averaging a nearly 10 percent return a year ago. In the high-risk, high-yield markets, where unemployment and vacancy rates are higher than national averages, the average return was a whopping 19 percent, actually up from a year ago thanks to a strong increase in rental rates. Home prices, meanwhile, were more volatile in the high-risk, high-yield markets, with three out of the 16 posting double-digit percentage decreases in median home prices from a year ago.”

More financing options for smaller investors

The biggest institutional investors in the single-family rental space have rolled out loan programs for investors looking to enter the space.

Read more at National Real Estate Investor

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