The rental market for real estate owned properties could reach $100 billion in 2012 with single-family REO investors in Florida and the Midwest reaping the most profit.
According to new data from CoreLogic ($27.65 0.39%), the single-family rental market is “strong and vibrant with stable rents, low months’ supply and a healthy pace of closings." The sector boasts potential returns for investors that are far and above many asset classes in the real estate market, helped by the government's new REO-to-rental program.
To measure single-family rental returns across the nation, CoreLogic examined capitalization rates among 26 markets. The best opportunities for single-family REO-to-rental investors, the company discovered, are in Florida and the Midwest, which boast high cap rates and a large stock of potential REO properties.
Capitalization rates are the most common metric for determining the profitability of an investment property and have been stable since late 2010, providing much higher returns than most investments. The rate measures the annual cash flows from renting a property relative to the acquisition price.
According to CoreLogic, West Palm Beach, Fla. (12.4%) offers the most attractive cap rate, followed by Cleveland (12.3%), Fort Lauderdale, Fla. (12%), Chicago (11.6%) and Las Vegas (11.4%).
The markets with the lowest cap rates include Honolulu (5.4%), Raleigh, N.C., (7.3%) and Austin, Texas (7.7%).
The common denominator for low cap rate markets is below-average prices relative to the other higher-yielding markets or markets where prices recently improved.
After making certain adjustments such as the normal REO 30% distressed-price discount, the cap rate for the nation's overall single-family rental market in January was 8.6%, down slightly from 8.8% a year earlier, but up about 3% from 2006 during the heath of the housing boom.
“If bulk sales do come to market, investors are likely to gain some concessions that are deeper than 30%,” CoreLogic said. “If the price discount rises to 40% to 50%, cap rates would increase to between 10% and 12%.”
Click on the image below for a greater breakout of markets with the highest and lowest cap rates.
And foreclosures are creating new single-family rental opportunities.
The majority of recently foreclosed borrowers move into single-family rentals, according to the Federal Reserve. During the last five years, completed foreclosures transformed more than 3 million homeowners into potential renters — more than the net increase in the number of the renters during the 1990s and the early part of the 2000s prior to the housing bust.
Census data show an increase in the share of the single-family housing stock that is rented in the hardest hit parts of the sand states of Arizona, California, Florida and Nevada.
In February, the Federal Housing Finance Agency announced the first REO-to-rental pilot of nearly 2,500 Fannie Mae properties.
“Given the government’s emphasis is shifting to the viability of converting REO housing stock into rental properties, there will be plenty of opportunities for large investors to participate and scale in a manner that previously was difficult,” CoreLogic said.
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