As home prices rise, there are fewer bargains in single family homes, but not fewer investors. Their ranks and property portfolios continue to grow. Last month Five Ten Capital, a Piedmont, California-based asset manager, inked a one hundred million dollar deal with Deutsche Bank to open a new fund to buy and manage single family rental homes, expanding Five Ten's range to Texas and Missouri.
"Obviously, home prices are up, so did you miss an opportunity? Yes, you'd have been better off buying a year ago than today, but we think for the most part we are in the third inning of this housing recovery," said Rob Bloemker, Five Ten's CEO.
Unlike the "flippers" of the last decade, today's investors in single family homes have a longer-term strategy. They buy largely with cash and seem intent on growing their portfolios, rather than recycling them. While some credit these bulk buyers with saving the housing market, they seem uneasy with that characterization.
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"I think investor activity has accelerated the recovery, but I don't think investor activity is responsible for the recovery," said Rick Sharga of Carrington Mortgage Holdings, a Connecticut-based group that invests in distressed homes and distressed mortgages. "If all 10 billion dollars of investor-announced funding had been spent last year, what percentage of the $1.7 trillion in mortgages written would that have accounted for? It's a rounding error really."
But these investors did help to clean up much of the distress created by the housing crash, especially in the hardest-hit markets, like Phoenix, Las Vegas and parts of California. Investors still accounted for 53 percent of home purchases in Las Vegas in March, according to DataQuick. Multi-home buyers bought 647 homes in the Las Vegas area in March, which amounts to 14.4 percent of all homes sold—a 20 percent increase from March of 2012.
There had been concern that as home prices rose, these investors would dump their homes back onto the market, and reverse the recovery. That is not the strategy, at least not yet.
"Investors aren't going to dump a lot of properties into a market and run the risk of losing money or devaluating the rest of their portfolios," noted Sharga.
They may not be selling, but some are changing their strategies, as they search for higher yields.
"We're not buying a lot [of homes] right now. We think the market is a little bit too frothy. We're very, very particular about our model and what we will buy," Sharga said. "We've been very active in the non-performing loan market. We'll look at other trades that don't have same kind of high-volume competition that artificially drives up some of those prices."
Los Angeles-based Colony Capital, which boasts approximately ten thousand single-family rental homes in its portfolio, had centered its investments largely in the Southwest and West, but is now shifting to other markets.
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"In terms of our mix, less is going to Arizona and California today," said Justin Chang a principal at Colony. "Our mix is increasing on east coast, Georgia, Florida, we're active in Texas. I think over time some of the early markets will become a smaller part of our overall portfolio."
Some investors are also starting to look at new construction, as home builders start to ramp up production again. The key is to find new product that is cheaper than replacement costs, which still is not that easy. So far investment has mostly gone only as far as distressed new homes, but as prices rise, that may change.
"On home building, there's a lot of chatter about that. We are in some conversations with builders," explained Chang, who admits the economics have not been compelling yet. "Over time you'll see more and more of these transactions, and we may do one as well."
Another potential strategy going forward is a consolidation, as investors turn away from distressed properties and focus on so-called "Mom and Pop" landlords, who may buy just one or two properties. There are an estimated 14 million single family rental homes owned by this cohort.
"If you think about all of the major institutions maybe owning 70,000 total homes compared to the market size of 14 million homes, the long term potential is enormous. Institutions are literally a fly on an elephant," said Aaron Edelheit, CEO of The American Home, an Atlanta-based company that owns and manages about 2,500 homes. "We may look back and realize that the REO [real estate owned] to rental space was only the foundation for an exponentially larger industry with institutions owning hundreds of thousands, if not millions, of homes."
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There are 7.2 million more renters today than there were in 2004, and just 400,000 more homeowners, according to the U.S. Census.
Despite the recovery in home sales, the homeownership rate continues to fall, from an all-time high of 69.2 percent to 65 percent in the first quarter of 2013. As home prices rise and the employment picture improves, more people will come back to home ownership, and some of the new rental homes will inevitably be sold, but certainly not all of them.
"If you buy homes in areas with below-median income, I think the mortgage market is going to have harder time providing credit to these people, and it's going to take longer for that to recover," said Bloemker. "We think that these homes are more likely to be long term rentals, and those are likely to end up in the hands of institutional investors."
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