Landlords seeking the highest returns for single-family homes should hit the road as rental rates weaken in Atlanta, Phoenix and Las Vegas, where institutional investors have flooded the market.
The best deals, measured by leases and the cost of becoming a landlord, are in Memphis, Tennessee, Saginaw, Michigan and Toledo, Ohio, according to a report today by RealtyTrac, a real estate data provider.
“In a lot of markets across the country, there are still some good opportunities to buy rentals,” Daren Blomquist, vice president of Irvine, California-based RealtyTrac, said in a telephone interview. “You may just have to look a little bit harder.”
Margins are shrinking fast in Phoenix, Atlanta and Las Vegas, as low mortgage rates fuel price increases and buyers from private equity firms compete for limited inventory. Blackstone Group LP, the world’s largest private equity firm, has spent $3.5 billion on 20,000 single-family homes, and Thomas Barrack’s Colony Capital LLC has raised $2.2 billion for rentals. In Memphis, a three-bedroom home generates a 10.4 percent annual return on investment compared with 8.8 percent in Phoenix, 9.7 percent in Atlanta and 9.9 percent in Las Vegas, according to the RealtyTrac report.
Prices of existing homes jumped 20.8 percent in Phoenix and 12.4 percent in Atlanta in the year through February, CoreLogic Inc., a real estate information service based in Irvine, California, reported yesterday. That compares with a 10.2 percent U.S. price increase during the period, the biggest year- over-year gain since March 2006, as the Federal Reserve pushed mortgage rates to record lows, potential homebuyers improved their credit scores to better obtain loans, and the pace of foreclosures slowed.
Eight of the top ten highest appreciating large markets are in California, with Phoenix and Las Vegas rounding out the list, according to CoreLogic.
Rents on single-family homes fell 1.9 percent in Las Vegas in the year through March, while rising just 0.3 percent in Phoenix and 0.8 percent in Atlanta, according to Trulia Inc., a San Francisco-based online real estate information service. U.S. rents rose 2.4 percent year-over-year through March, according to Trulia. The gain was just 0.1 percent for single-family home rents as apartment rates climbed 2.9 percent.
“The supply of single-family rentals has now caught up to meet demand,” Trulia Chief Economist Jed Kolko said in a telephone interview from San Francisco. “For those who’d been counting on appreciating rents to justify that investment in homes, in many markets, that’s over.”
Jon Grabowski, president of Precise Associates Inc., a single-family investor based in Detroit, said he’s been selling homes in Florida, Phoenix and Atlanta while buying in Nashville, Tennessee; Indianapolis, Indiana; and Raleigh and Charlotte, North Carolina.
“As returns have come down, now it makes sense to hit the tertiary markets,” Grabowski, whose company has invested $100 million in single-family homes, said in a telephone interview.
Precise, which buys homes for cash, is selling to institutional investors who are able to pay a higher price because they have a lower cost of capital, Grabowski said. He declined to name the buyers, citing confidentiality agreements.
Prices in Nevada, Florida, Michigan and Arizona have the largest peak to current drop, according to CoreLogic. That still makes them attractive to investors who are betting on home-price appreciation in addition to cash flow from rents.
Las Vegas ranks fifth, Atlanta seventh and Phoenix 14th on RealtyTrac’s list of the 20 best markets for buying single- family rentals and eight of the top cities are in Florida.
“There are still good opportunities even though we’re past the bottom,” RealtyTrac’s Blomquist said.
Institutional investors should focus on factors beyond rental yields and the cost of becoming a landlord, such as crime rates, job growth, and proximity to retail, when selecting homes to buy, according to Jordan Kavana, director of Aventura, Florida-based Transcendent Investment Management, which has been acquiring single-family homes since 2008.
Transcendent, which plans to spend $500 million on rentals by 2014, is looking at where it can invest for the “long run and not just a quick flip,” Kavana said in an e-mail.
Carrington Holding Co. LLC, one of the first single-family investors to receive institutional financing with a $450 million commitment from Oaktree Capital Group LLC announced last January, has “slowed acquisitions because the market seems to be so frothy,” said Rick Sharga, executive vice president of Aliso Viejo, California-based Carrington.
“We’re probably overdue for a correction, simply because there’s a huge imbalance between what it costs to rent versus what it costs to buy in most markets,” Sharga said in a telephone interview. “The real danger for investors now is paying too much for the asset itself and then seeing rental rates fall.”
The cost of renting a home was 44 percent higher than owning, after factoring in costs such as insurance and taxes and benefits, such as mortgage interest tax deductions, Kolko said. That’s little changed from a year ago, even as home prices rose, because lower interest rates have kept housing affordability level, he said.
American Residential Properties Inc., an owner of single- family rental homes that plans to raise $300 million in a U.S. initial public offering, has expanded its portfolio to states such as Indiana, North Carolina and South Carolina, the Scottsdale, Arizona-based company said in a filing last month. Since January, American Residential Properties has purchased almost 300 homes in the Chicago area, where rents generate a median 7.2 percent on a three-bedroom home, according to RealtyTrac.
“When the values go up faster than the rental, it’s time to sell your property to end users,” Jim McClelland, president of Mack Companies, a Tinley Park, Illinois-based single-family rental operator that sold homes to American Residential Properties, said in an interview last month.
Demand for rentals has outstripped Americans’ ability or desire to buy. The number of rental households increased by 1.1 million in 2012 while the number of owner-occupied homes fell by 106,000, according to Commerce Department data. That trend may be starting to shift.
About 7 million homeowners have lost their properties through foreclosure or by selling for a loss since 2007, according to RealtyTrac. More than 1 million of them are now eligible for mortgages backed by the Federal Housing Administration, which requires a three-year waiting period and a minimum 3.5 percent down payment, said Mark Zandi, chief economist for Moody’s Analytics Inc. in Westchester, Pennsylvania.
“The scales will tip back toward home ownership as opposed to a renter nation, because people are realizing that home prices are good,” Blomquist said. “So rental rates will flatten out. ”