Institutional investors acquiring single-family properties and convert them into rental properites focus on many of the same cities, but there are still markets where the competition for these types of assets remains low.
RealtyTrac and RentRange have come up with a list of 25 markets where single-family rental units have the highest gross rental yields, institutional investor purchases accounted for less than 5% of sales in the three-month period ending in July, and the unemployment rate was 7.5% or lower.
At the top of the list are Texas’ Wichita County and Lubbock County where the median market value for a single-family home is $84,000 and $111,000 respectively; while the median rent value is $938 and $1,089 respectively. This results in a gross yield of 13.4% for Wichita County and 11.8% for Lubbock County. The unemployment rate in Wichita County as of July is 6.8%, in Lubbock the rate is at 6.1%, said RealtyTrac and RentRange.
The top 25 markets were determined by evaluating gross rental yield data provided by RentRange, institutional investor sales data, and unemployment data for more than 450 nationwide counties with populations of 100,000 or more.
The list will come in handy for smaller investors competing with larger institutional investors that have saturated the single family home rental market.
“Buying single family homes as rentals still yields solid returns in many markets across the nation, but it is difficult for individual investors and even small-to medium-sized institutional investors to find reasonably priced inventory in markets dominated by the 800-pound gorillas in the single family rental space,” said Daren Blomquist, vice president at RealtyTrac. “With this analysis we’ve identified the top overlooked markets where single family rentals still make good financial sense but where there is little to no competition from the big players.”
According to a September Deutsche Bank report on the asset class the six largest private equity firms, partnerships and REITS participating in this sector have purchased some 81,000 houses in the last 12 months alone.
However the saturation is likely larger since performance in the institutional single-family rental business is limited to those firms that have completed initial public offerings, such as American Homes 4 Rent, Silver Bay and American Residential Properties; or have considered IPOs, such as Colony Financial and Waypoint homes.
“Blackstone—the market leader—has done neither, so there is little publicly-available information about its operations other than the location of its properties.” According to Deutsche Bank, Blackstone has $5.5 billion invested in the asset class and has acquired 32,000 units.
These levels of institutional investor buying will ultimately drive prices up and rental yields down.
“Heavy buying from large institutional investors in some markets contributes to price appreciation and scarcity of listings, leaving small investors and owner-occupiers feeling left out in the cold,” said Jake Adger, chief economist of RealtyTrac.