On Friday, RealtyTrac reported that “cash sales”, its proxy for SFR investments, declined in 2014 as institutional buyers scaled back their purchases. This wasn’t really surprising; given the investment strategies that major institutional investors had been pursuing over the past few years depended on a large supply of severely discounted properties. Now that the “bargains” are gone, so too are the bargain hunters. (Interestingly while new purchases were down in 2014, bond issuances, backed by SFR properties, soared: 10 deals, valued at $7.5 billion came to market last year, according to KBW.)
But just because the institutional players aren’t as interested in making money in a more normal real estate market, doesn’t mean that there isn’t money to be made by smart individual investors. In fact, SFR investing has always been the purview of smaller, more nimble investors. Here are a couple of stats to ponder. While institutional buyers acquired somewhere between 200,000 and 400,000 properties in the last four years, investing north of $67 billion; that accounted for less than 0.1% of all US residential properties. The rest of the SFR market, approximately 14 million homes, valued at more than $2.8 trillion—yes, that’s with a “T”—is owned by non-institutional investors who see the value of these cash-flowing assets.
It certainly isn’t the potential returns. In the right markets (and these aren’t necessarily the hottest or coolest), individual investors can get unleveraged returns of 6.5% or 12% using financing. Of course, this is in more stable, less exciting markets like Indianapolis and Cleveland, and not “hot” markets like Las Vegas or South Beach. These “fly-over” states tend not to attract the attention of institutional buyers nor foreign investors looking for a haven for their capital (guess these markets are harder to see from private jets). However they are our focus at HomeUnion because they offer steady income streams, stable underlying values and lower costs to entry.
What is changing is the growing awareness of SFR as an investment class. Individuals increasingly understand how to calculate cap rates and investment returns. Also, thanks to companies like ours, they are realizing that the better opportunities are often in other states, not just the next neighborhood over. They are also learning that new high-tech, high-touch options to find, buy, and manage these properties as pure investments are available.
With more individual investors acquiring remote SFR properties, they are becoming an important piece of a well-balanced investment portfolio. The RealtyTrac report gives a good snapshot of a small part of the market—but the rest, what wasn’t covered in the report, makes for better long-term investments.