While the single-family/real estate-owned rentals could grow in the short term — absorbing excess inventory through shadow inventory pipeline — the long-term outlook remains cloudy. 

For single family rentals to develop into a sustainable asset class, property managers and investors will need to show the advantages of scale in operating efficiencies compared to individual investors who manage bulk rentals in a single location of the nation, Barclays (BCS) said in its housing and residential credit outlook. An in-depth analysis ran in the December 2012 issue of HousingWire magazine.

Non-agency mortgage-backed securitizations are slightly concentrated in parts of the Sun Belt region of the U.S., with the exception of Florida. As a result, the impact on defaults and severities are expected to be limited.

The opportunity in rentals remains bright over the next two to three years as slow inventory pipelines are projected to keep a steady supply of distressed properties. Debate remains on how monetizable this asset could be, long term, on the secondary market. Moody's Investors Service already warns that the asset class may pose risks not typically found in traditional (multifamily) CMBS and (single-family) RMBS.

Given the massive rally in non-agency bonds during the last six months of 2012, unleveraged yields in the residential mortgage-backed securitization spaced converged to about 5%, even as single-family rentals continue to provide roughly 7% unleveraged yields.

Another opportunity in rentals is the decline in homeownership from 69% to 65% as well as adjusting for shadow inventory to 61%, Barclays noted.

Click on the graph to view homeownership rate trends.

In regards to the economics of buying to rent, staying in areas with strong housing fundamentals is key. As a result, areas with depressed land shares and positive demographics. 

The potential for a strong recovery is highest in the fast-growing, though depresses metropolitan areas such as Atlanta, Las Vegas, Phoenix, and Tampa, which also exhibit high rental yields. 

Click on the list to view estimated returns on single-family rentals in metro areas. 

The biggest threat to single-family rentals is operational risks, even though the overall yield looks attractive on paper. 

The primary risk from an operational standpoint is whether the rental yields can be maintained while achieving large enough scales. As a result, keeping operating and maintenance costs under control is a primary factor. 

"Acquiring scale can lead to market impact costs with investors either paying up or being less selective about the properties they acquire," the report stated.