How are you funding your escape? Many EscapeArtists use real estate income. RJ Palano shares an update on the market for single-family homes as rental properties.
In 2006, 69% of the U.S. population owned their home. Since the Great Recession, this figure has tumbled to approximately 63%, creating a new asset class on Wall Street of single-family houses (SFH).
Hedge funds have jumped into this market because single-family homes:
- Generate higher rental returns and lower volatility than other major asset classes.
- Are the most liquid of all types of real estate.
- Offer protection against inflation.
The housing bubble in the U.S. is over. Prices are still rising in most major markets. The housing market has undergone a fundamental change to support a renter society and hedge funds are jockeying for shares of the market.
A few short years ago, the discount for houses was more than 50%, but not anymore. The surplus of REO houses has been absorbed by investors and inventory is moving back to normal levels. (An REO or Real Estate Owned property is one that returns to the mortgage company after an unsuccessful foreclosure auction.)
Demand has increased primarily from the investment side of single-family houses. Potential homeowners are being forced out of the market due to personal credit issues, stricter lending policies, and investors paying all cash for houses with the expectation of a rental return and future appreciation.
Appreciation is all but guaranteed in trophy markets as prices are still below the peaks of 2007. The returns of net rentals varies throughout the U.S. based on location. Important factors to be considered are job creation, quality of life, landlord issues in liberal states, income trends, cost of labor, state income tax, property tax, and homeowner’s insurance.
A key component that should never be overlooked is the exit strategy. With stocks, mutual funds, and precious metals, you simply call your broker to sell your asset at the market rate less commission. Single-family houses require more strategic thought in advance of acquisition: Who will be your future buyer? If you buy in lower income areas or areas of declining population, then your future buyer will probably be another investor. You may have to offer financing to get out of certain types of properties, or take a discount.
If you acquire better properties in sought-out areas, you can ultimately sell to future homeowners that will pay more for emotional reasons. It’s a much different strategy when selling to a potential homeowner than another investor, and it allows the seller to fully capitalize on maximum profit.
The current trend of U.S. households choosing to rent is not going away soon. Thus, life is good for investors that desire dividends in the form of rent every month with capital appreciation.
Recent data shows that building starts are up. This is due to the hedge funds snapping up properties at retail prices in markets throughout the U.S. What most people don’t know is that the hedge funds are buying the new builds as well. (I know. I just sold a hedge fund more than 50 pre-built homes.)
The demand for a rental home is driven by the lifestyle elements offered in the area near that rental home. Students, young single adults and empty nesters that rent, are usually in smaller apartments of 1000 square feet or less. Married couples and family formations typically require more space and prefer single-family homes with more square footage. The logical conclusion for investors would be to buy in areas where jobs and families are being created.
America is still the home of the free and the brave, and the fact that more people are renting is not bad for this country. We have seen what happens when irresponsible buyers, with the help of irresponsible lenders, become homeowners.
This all bodes well for the investors that buy single-family houses for cash flow, safety and future appreciation.
Buy-to-rent and build-to-rent are the new buzzwords on Wall Street and there are no signs of this trend slowing down.
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