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Editor’s Note: Dennis Fassett is a former corporate finance executive turned real estate investing “Cash Flow Mercenary.” Dennis specializes in single-family and multi-family cash flow properties and thoroughly enjoys assisting his fellow investors with their own strategies, including how to buy your first apartment building.
As an ongoing contributor to Mogul’s “Market News Updates,” Mr. Fassett provides us with his own unique, lively, and thought-provoking commentary on the timely industry news and events of today that are impacting our industry. And be sure to check out his other super-helpful Market News Updates. For now, enjoy...
From Dennis Fassett, Cash Flow Mercenary...
I’m always looking for an indication as to where the big money is going in real estate to try to get a feel for where the market is headed.
I saw a piece recently that talked about how despite rising prices, “institutional investors” continue to buy single-family rentals.
With all the seemingly bad news out there regarding the housing market, I was particularly interested in why they were not only still buying – but buying more.
They quoted one analyst who speculated that it’s primarily being driven by the stock market.
The analyst stated that:
“…investors are willing to accept much smaller returns, because a volatile stock market has made investors wary.”
He believes that investors are “viewing single-family rental housing as much more attractive than other options.”
I found it interesting that the share of single-family homes bought by investors stopped shrinking in 2016 after declining for several years… and that investors have also begun to buy single-family rental houses from each other, as companies and individuals that specialize in managing single-family rentals take over from investors who seized the opportunity to buy underpriced houses earlier in the recovery.
The Biggest and Smallest Investors Remain
The author quoted another analyst who wrote that:
“There will be a handful of entities that will stay in the single-family rental business for the long-term, and who will look to buy portfolios from tired investors.”
The numbers show that so far this year, institutional investors have bought more single-family homes than in all of 2015.
In the first half of 2016, institutional investors bought 2.9% of all of the single-family homes bought and sold in the U.S. That’s up from 2.6% in 2015.
The author wrote that it’s a new direction for single-family rental investors, who burst into the housing market during the early years of recovery from the housing crash, and bought an astounding 9.4% of all the homes bought and sold in 2013. They subsequently cut back on their buying as home prices rose.
He also believes that the smallest investors in single-family rentals might also become more prominent in the industry. These individuals often own a few properties apiece and have always owned the majority of rental homes.
He wrote that:
“This is going to return to the small investors, who buy one, two or three properties a year.”
The Downside
But, due to rental demand and a tight supply of housing, investors are paying more for single-family homes. Prices for single-family rentals have been rising more quickly than the rents, driving down the yields investors receive from their assets.
He said that there are now 45 markets where the average cap rate on a single-family rental is less than 6.0%.
According to another analyst:
“Anything over 6.0 percent is a market you should at least consider. Below 6.0 percent, if you are going after cash flow, you are going to want to avoid that market.”
The interesting thing, however, according to the analyst is that some investors can make lower cap rates work.
The author closed by talking about a new set of property brokers, including OwnAmerica, who now arrange transactions to buy and sell single-family home rentals. In the past, most residential brokers would not attempt to sell a single-family house with a renter living in it.
Investors can save a lot of money by selling tenant-occupied single-family rentals...
The ‘friction cost’ of asking rental tenants to move out, fixing up the house, and then leasing the house again after a sale can equal 8%-12% of the cost of the properties.
The old way of doing business also hurts the tenants.
Care to Share
What do you think about this single-family rental info? Share below.
Dennis Fassett
earned a BS in Economics and followed that up with an MBA in finance. After working and corporate finance and banking for several years, he started buying single family houses, and quickly built a very nice portfolio of cash flowing rentals. When the credit markets started to dry up and he couldn’t get any additional single family mortgages he shifted his focus to apartment buildings. He now has over $3 million in rental real estate. He manages most of it his self and still has a day job. Dennis has even created his own Private Equity fund to buy apartment buildings.