MReport April 2017

TheMReport — News and strategies for the evolving mortgage marketplace.

Issue link:

Contents of this Issue


Page 13 of 67

12 | TH E M R EP O RT MDWELL The Single-Family Rental Market Pinpointing Investment Opportunities The flourishing single-family rental market holds plenty of potential for high returns, particularly if you focus on yield quality over quantity. The key, though, is knowing where to look. T he single-family rental market has become a thriving part of the real estate industry. Millennials are tied up in high debt and bogged down by lower wages, while baby boomers are dealing with recent foreclosures or plans to downsize and retire. So it's no surprise that fewer households are purchasing homes when renting single-family homes of- fers all the lifestyle benefits of owning—just without the debt. Opportunity in a Shifting Market W e reached out to HouseCanary, a real estate data analytics firm, to learn more about the future of the single-family rental market for investors and lenders. And it's good news: The nation- al median effective gross yield is 7.7 percent, generally considered attractive in the industry. Effec- tive gross yield is defined as the current fair market annualized rent minus estimated property tax, divided by the current fair market home value (further defined in the "HouseCanary's Methodology"). "As fewer households are pur- chasing homes, demand for rental units is likely to propel stable growth in rental prices, whereas the rising cost of homeownership will keep home price appre- ciation in balance," said Jeremy Sicklick, CEO and Co-Founder of HouseCanary. "We believe the best is yet to come in the single- family rental market." With positive indications of strong industry tailwinds, the po- tential for high returns in the cur- rent market exists, but it greatly depends on where you choose to invest. So where should investors and lenders look to optimize their investments? The Flight to Affordability W ith a shifting single- family rental market, it has been getting harder to find attractive invest- ments. Over the last five years, there has been a 37.5 percent home price growth across the United States, which has been disproportionately impacting the most desirable neighborhoods of major cities. The most-valuable homes in the least-affordable areas are returning low effective gross yields, while the least- valuable homes in the most- affordable areas are returning high yields. What's happening? Why aren't high-valued homes producing high yields in the single-family rental market? For one, rent prices are strug - gling to keep up with bloated home prices in those highly valued areas, resulting in compressed effective gross yields. This story is well represented in HouseCanary's "Effective Gross Yields of Top 50 Metropolitan Statistical Areas (MSAs)" chart. HouseCanary ex- amined all the single-family homes in the MSAs and analyzed the cur- rent home valuations (not including appreciation), rental valuations, and estimated property tax to calculate effective gross yields. Effective gross yields are lowest in the West (e.g., San Francisco, Seattle, Los Angeles) and Northeast (e.g., Boston, New York), as home appreciation continues to outpace rent appreciation in these metropolitan areas. Instead, single- family renters are flocking to more historically affordable places, like the Midwest (e.g., Cleveland, Indianapolis, St. Louis) and South (e.g., Atlanta, Birmingham, Memphis), helping produce higher- than-average returns and fostering industry growth in these areas. Pockets of Investment Potential A s renters continue to disperse to areas that are more affordable, it's key for lenders and investors to garner deep insights into where exactly these renters are moving. Take a look at the "Atlanta, GA: Median Effective Gross Yield by ZIP Code" heat map. Atlanta has one of the highest effec- tive gross yields at 9.2 percent among the top 50 MSAs. But even within the Atlanta MSA, effective gross yield varies widely, with top-performing ZIP codes generating a whop- ping 25.2 percent effective gross yield, with the lowest generating only 4.5 percent. Local dynam- ics, such as household income and shifting demographics, contribute to these highly vary- ing returns. The visualization of Atlanta's effective gross yields on a ZIP code level pinpoints pockets of investment opportunity. Since many of Atlanta's neighboring ZIP codes have such disparate yields, finding the next hidden gem can be as simple as looking in your backyard at a similar property— but with a much higher return. The same can be said about Seattle. Many high-yielding neighborhoods border the lowest- yielding areas. But, unlike Atlanta, Seattle's effective gross yield range is not as wide because of ballooned home prices that continue to con - strict yield growth. With Seattle's homes increasingly appreciating, affordability has gone down, con- tributing to lower returns. Local yields vary from an incredibly low 2.7 percent to a nearing national average of 9 percent. So how can lenders and inves- tors optimize their portfolios? The numbers are clear: Focus on yield quality (investing in fewer proper- ties with higher yields) over quan- tity (investing in several properties with lower yields). And who knows? Your next big investment might just be in your backyard.

Articles in this issue

Links on this page

Archives of this issue

view archives of TheMReport - MReport April 2017