In a deal announced earlier this month, Cerberus Capital Management is buying 4,200 homes, expanding its presence in the home rental industry with the largest bulk purchase to date.
In the aftermath of the housing market crash, many institutional players entered the rental market, buying large quantities of single family REO homes at discount, hoping to take advantage of a growing rental market and undervalued assets, making healthy margins as the housing market healed. Seven years later, this market is being consolidated as some look to realize profits while others take advantage of economies of scale.
There will always be a need for rental properties and investors to purchase them. All investors, from individuals looking to rent a few apartments to large management firms looking to manage thousands, are looking for opportunities that will provide a fair return. This month we look at some rental markets around the United States and some different ways to analyze their desirability.
Desirable Rental Markets
Top rental markets can mean different things to different people, and different investors can use different criteria when analyzing where to purchase property. Desirability of location, employment trends, rental yield and home appreciation might all be used depending on goal and timeline. For example – an investor that is looking to sell a rental property after five years would use different criteria than one looking for a long-term investment.
A few different criteria that an investor might use:
Price-to-Rent ratio measures the average selling price of a home divided by the average cost to rent for a year. SmartAsset.com took the ratio further to look at the projected home price for a rental costing $1,000 a month:
As you can see, three of the nation’s most expensive cities, San Francisco, Honolulu and New York City, are represented. These areas are desirable to live in for jobs and amenities, but home prices keep many to only renting – resulting in a large and stable rental market.
Honolulu is a perfect example. Low rental vacancy, high rent and high appreciation might make it attractive to long-term investors.
Another way to look at it is rental yield, the expected yearly rent income divided by property purchase price. Higher yields are usually in areas where home prices are lower.
Detroit is a place where low home prices might be attractive to an investor in rental properties. With a yield of almost 20%, an investor can recoup an investment in five years if at 100% occupancy.
A recent Deutsche Bank market outlook report ranked top housing markets for rentals using a combination of yield, rent appreciation and housing appreciation. According to the report, the best markets to make profit for a single family rental investor was where rent appreciation exceeded home-price appreciation. Below are the top three markets:
Home Value Forecast data supports the Deutsche Bank findings in that housing appreciation in Providence has been undramatic:
And the Collateral Analytics Forecast shows moderate growth in the future:
So where does the rental investor purchase? It really comes down to investment goals, timeframe and risk. All three techniques above might be right depending on your particular circumstances.
While much can be learned from the past, the bottom chart is a simple calculation of theoretical return if you purchased a home in the three cities we outlined above in 2003, rented out for ten years and sold in 2013. Looking at nothing but total return (no tax, maintenance or other implications), returns would look like this:
Now what if you bought the same properties in June, 2005 and sold in June, 2015 – how might your return be different?
Honolulu’s return suffers dramatically as much of the home appreciation was early in the decade. Detroit prices were already slipping, making their returns look better.
Finally we look at the same three, but for an investor with a five year timeframe:
In this final analysis Detroit is the clear winner, as the purchase price is post housing crash and the rental yield far exceeds the other two cities. It will be interesting to reevaluate five to ten years in the future.
CBSA Winners and Losers
Each month, Home Value Forecast uses a number of leading real estate market-based indicators to rank the single-family home markets in the top 200 CBSAs to highlight the strongest and weakest metros.
The ranking system is purely objective and is based on directional trends. Each indicator is given a score based on whether the trend is positive, negative or neutral for that series. For example, a declining trend in active listings would be positive, as will be an increasing trend in average price. A composite score for each CBSA is calculated by summing the directional scores of each of its indicators. From the universe of the top 200 CBSAs, we highlight each month the CBSAs which have the highest and lowest composite scores.
The tables below show the individual market indicators that are being used to rank the CBSAs, along with the most recent values and the percent changes. We have color coded each of the indicators to help visualize whether it is moving in a positive (green) or negative (red) direction.
Top 10 CBSAs
The top ten, actually the top twenty CBSAs this month were all in the west or south west, with the furthest north CBSA being in Texas.
There are several new markets in the top ten this month including Portland, Cheyenne, Grand Junction and Colorado Springs. Also, for the first time in six months, San Francisco is not in the top ten as the number of sales have started to decline. All of the markets have months of remaining inventory (MRI) less than six months, which is an indicator of a “healthier” market and also the foreclosures as a percentage of sales is less than 10 percent for all, with some less than 3 percent.
Bottom 10 CBSAs
The bottom 10 CBSAs are all from the eastern United States. As is expected with the bottom ten markets this month, there continues to be very high months of remaining inventory. In Atlantic City, which is a new addition to the list, MRI is more than 22 months. In all of the bottom ten markets, foreclosures as a percentage of sales remains more than 25 percent and in Jackson, MI is higher than 55 percent.
About Home Value Forecast
Home Value Forecast (HVF) is brought to you by Pro Teck Valuation Services. HVF provides insight into the current and future state of the U.S. housing market, and delivers 14 market snapshot graphs from the top 30 CBSAs.
HVF is built using numerous housing and economic data sources. The top 750 CBSAs as well as data down to the ZIP code level for approximately 18,000 ZIPs are available with a corporate subscription to the service. To learn more about Home Value Forecast and Pro Teck’s full suite of residential real estate valuation products, visit www.proteckservices.com. You can also find Pro Teck on Twitter at @Pro TeckServices.
The monthly Home Value Forecast update also includes a listing of the 10 best and 10 worst performing metros as ranked by its market condition ranking model. The rankings are run for the single-family home markets in the top 200 CBSAs on a monthly basis. They highlight the best and worst metros with regard to a number of leading real estate market indicators including: sales/listing activity and prices, months of remaining inventory (MRI), days on market (DOM), sold-to-list price ratio and foreclosure percentage and REO activity.
Also, Pro Teck Valuation Services offers reporters the following:
- National, regional or metro level housing data
- Monthly Updates and HVF Insights articles
- By request data for your story – custom data, heat maps and charts are available
- Expert commentary from Home Value Forecast Editorial Committee:
- Tom O’Grady, Chief Executive Officer, Pro Teck Valuation Services
- Michael Sklarz, PH.D., President, Collateral Analytics
- Jeff Dickstein, Chief Appraiser, Pro Teck Valuation Services
Janice Daue Walker, JD Walker Communications, LLC
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