Residential Rental Property Markets Providing Investors Solid Returns

by The Real Estate Buyers

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Research studies indicate that real estate owned properties have a rental market that will easily reach $100 billion this year (2012). The biggest beneficiaries will be single-family REO investors in the Midwest and Florida.

Research findings from CoreLogic show that the rental market for single family rentals are very strong and vibrant. This is because the market is characterised by stable rental income, high closing pace and low monthly supply of rental houses. The sector is among the few in the housing market that provides investors with returns that are higher than most returns from other asset classes in real estate. This sector is also favored by the new programs launched by the government i.e. REO to rental program.

CoreLogic recently utilised capitalization rates for 26 markets to measure the rental returns generated by single family rentals across the nation. According to the findings, CoreLogic discovered that the most lucrative opportunities for single family REO’s to rental investors are in the Midwest and Florida due to adequate stock of potential REO property and also due to the high cap rates.

Capitalization rates are effective and common measurement tools for measuring the profitability of investment property. Capitalization rates have displayed stability since year 2010 thus they are currently the most suitable tools for measuring annual rental cash flow. The rates have also proved to provide a higher return for real estate investments which is another reason why they are popular. The rate basically measure annual cash flows generated from renting property relative to the property’s acquisition price.

According to CoreLogic, the most attractive capitalization rate is 12.4% for West Palm Beach, Florida. The second most attractive capitalization rate is 12.3% for Cleveland. Other attractive capitalization rates include; 12%, 11.6% and 11.4% for Fort Lauderdale, Florida, Chicago and Las Vegas respectively. Markets with the lowest capitalization rates include; Honolulu, Raleigh, N.C and Austin, Texas with 5.4%, 7.3% and 7.7% respectively. It is important to note that markets with low capitalization rates all have prices that are below average relative to markets with higher yields or those markets where real estate prices have improved recently.

The current capitalization rate after adjustments stands at 8.6% for the single-family rental market. This is a slight decrease from the 8.8% recorded in January 2011. It is however an improvement i.e. a 3% improvement from the capitalization rate (cap rate) recorded in 2006 when the country was experiencing a housing boom. According to CoreLogic, bulk single family sales are likely to gain investors concessions which are deeper than 30 percent. Also, cap rates are likely to increase to 10 to 12 percent if the price discounts increase to approximately 45% which will in turn create new rental opportunities for single-family rental property.

Research studies indicate that the government has recently been emphasising a shift i.e. the effectiveness of converting REO housing stocks into rental property. If and when this is happens, there will be very many adequate investment opportunities especially for large investors who want to participate in the single family rental market in a way that was previously difficult for them to participate.

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