The highest yielding properties in single-family rental securitizations also experience the highest vacancies, and ultimately lower annual rental cashflows, Morningstar warned in a new report published Friday.
The report noted that purchases by institutional buyers appear to focus on a combination of portfolio yield and an expectation of long-term home price appreciation. In securitizations, the focus is largely on generating monthly cash flows that can meet the bond debt service coverage obligations.
“Buyers have therefore come to use rent yields as their hurdle rates in their property buying decisions,” the report states. “By doing so, the buyers ensure that the underlying properties not only generate adequate monthly cash flows but that their investments also satisfy their internal rate of return requirements.”
However, rental yields do not provide the complete picture about the profitability of a property because these properties also experience the highest vacancies. For example, lower priced, lower quality homes generate high rental yields but are exposed to higher tenant turnover because the properties are “located in less desirable areas with weaker school district,” the report states.
“The inclination to extract higher rent yields makes sense, but that also could expose properties to potentially higher vacancies,” stated analysts in the report.
The chart below shows rental yields on the multi-borrower, single family rental deals are approximately 500 basis points higher than the single borrower deals.