Investors still like rentals: Where are they buying?

With home prices still rising and fewer distressed properties coming to market, some claim the single-family rental trade is over. Investors will hold the homes they have and securitize the assets in order to leverage their investments, but they won't buy any more.

"There is very little institutional buying at the present time, as prices have increased to the point where the returns on new investment are insufficient," wrote Laurie Goodman of the Urban Institute in a recent report. She even went so far as to predict a $20 billion cap on the single-family rental securitization market.

Laurie Hawkes, president and COO of Scottsdale, Arizona-based American Residential Properties, a single-family rental REIT with roughly 9,000 homes, firmly disagrees.

House for rent
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"The buying is not over," said Hawkes. "The math may not work in markets such as Arizona and California, but it's no different than any other asset class where some heat up faster than others and then you move on."

American Residential may not be buying in Phoenix anymore, but it is spending about $100 million per quarter (roughly 800 homes) in markets like Charlotte, North Carolina, and Nashville, Tennessee

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"We see far more opportunity to buy than we have capital," added Hawkes.

One thing that all agree upon is that smaller and individual investors are increasingly entering the single-family market. While rental returns are falling slightly for properties purchased today, due to higher home prices, they are still well in the positive.

"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."

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As with everything in real estate, the single-family rental trade is local. Some higher-risk markets, where unemployment and vacancy rates are elevated, offer rental returns as high as 19 percent; other pricier markets offer low single-digit returns.

RealtyTrac found markets in North Carolina and Georgia offered some of the highest rental returns, while markets in the New York/New Jersey area, as well as San Francisco, offered the lowest. Some of the "safest" markets for rental investors, where unemployment and vacancies are below average, were in Springfield, Ohio, Miami and Tulsa, Oklahoma.