From Inman News: Why hold single family rentals

*Article orginally published in Inman News

Recently speculation has mounted that conditions are right for significant portion of the 5.4 million single family homes that switched from ownership top rentals during the foreclosure era to return to the fold like prodigal children now that inventories are running on empty.

Prices are right, the thinking goes, and by now all those small investors who put their money into rental real estate must be tired of being landlords. Now they can recoup their principal and pocket a nice profit without ever cleaning up after another messy tenant again.

You’ve got to be kidding me.

Right now, this very market, is exactly the one those single family renter investors have been praying for all these years. Apartment rents are rising at record pace, reaching 5.8 percent in the fourth quarter, the highest rate of increase since 2007.

Rents are expected to remain well above long-term averages in both annual effective rent growth and occupancy rate during 2016, the market’s seventh year of post-recession expansion.

Axiometrics forecasts rent growth slowing a little next year to an average 3.8 percent, with occupancy averaging 94.6 percent. That’s nearly 4 percent more cash in the pocket of every landlord who didn’t sell out in 2016. Single family homes rent for about 1.5 to 1.6 times the average multifamily unit. Who in their right mind would leave the party when they just broke out the birthday cake?

Current state of single family rentals

People invest in single family rentals (SFR) because they have dual income streams: cash flow generated by rents and appreciation of the property’s value over time. Both rents and appreciation are at their peaks right now in the country’s hotter markets.

These are also exactly the same markets where inventories of entry-level homes are desperately low — so low they are a deterrent to sales. Landlords love the inventory drought. It drives up both sides of the equation. The properties appreciate faster and their tenants re-up for another year because they can’t find an affordable first-home to buy.

There’s no reason to believe the large numbers of homes that went from ownership to rental will ever switch back; after all, there’s nothing new about single family rentals.

According to a report by Harvard’s Joint Center for Housing Studies, in 2011 when the foreclosure crisis had yet to peak, some 35 percent of all rental units were single family rentals compared to apartments, which accounted for just 29 percent.

However, if even a small slice of today’s 15,194,827 single family rentals converted to ownership, the impact on inventories would he dramatic.

What would it take to move investors to sell?

Certainly, a complete reversal of current occupancy trends would do the trick. Today rental occupancy was 95 percent in the fourth quarter, the highest Q4 rate since the 95.9 percent at the end of 2000.

In the Great Recession of 2009, vacancy levels nationally rose to a 22-year high of 7.5 percent in the April-to-June period, up from 6.1 percent a year earlier. Nothing will make SFR investors more nervous than vacant homes. When a multifamily building has several vacancies, it’s a problem. When a rental home has a vacancy, it’s a crisis.

Vacancy rates for SFRs are hard to track today. One source is rentals incorporated in the 22 securitizations by large hedge funds to date.

A recent Morningstar report found that retention rates in those securitizations are trending higher in today’s market while turnover rates have stabilized or are generally declining. Yet not all tranches are faring well. Turnover rates increased to 6.1 percent and 5 percent, respectively, in November, making them the two highest turnover rates for November.

As long as demand outstrips supply the prospects are slim that significant numbers of SFRs will revert back to ownership, especially in hotter markets. But that might change.

The factors at play for reaching equilibrium

The magnitude of new apartment construction that has come online so far in 2015 is much greater than anything seen over the past few years. The annualized number of completions in just the first half of 2015 was 285,000 units, 35,000 more than were added in 2014. Moreover, multifamily permits increased nationally by 52,000 year-over-year, surging in the first half of 2015 to the highest level since 1986.

“Increasing multifamily permits indicate that construction starts and completions will remain elevated for several more years. Although demand also will remain elevated, we expect vacancy rates to tick up slightly and rent growth to slow down in the short term, before markets reach equilibrium near historical average levels,” it said in Freddie Mac’s multifamily outlook for the second half of 2015.

Will multifamily construction and overshoot demand? The opening of enough new capacity to relieve the pressure on rents and vacancy rates and bring supply and demand into better balance could be enough to cause vacancies in the SFR market and encourage more small investors to cash in.

Steve Cook is editor and co-publisher of Real Estate Economy Watch. 

Read the original article here.


Tags

Gainesville property management, real estate, rentals, single family homes


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