Two of the largest real estate investment companies, American Residential Properties and American Homes 4 Rent are merging together to further their reach and capitalize on the growth in the real estate investment space, reports CNBC. Several other large real estate holding companies will be following suit and merging; this major change in the industry should strengthen the average investor’s confidence in the single-family rental market, as these companies see the benefits of the current market and are moving away from their initial strategy.
Originally, these real estate investment companies sought out foreclosed homes that could be purchased at low prices and then rent them out while they waited for the markets to improve. While the markets did improve with sizable profits, the overall shape of real estate ownership is changing across the U.S.
Homeownership has taken a steep decline, which has sent rental vacancy levels at or near 30 year lows. The price of rents has been increasing and a subtle shift in the culture of ownership from first-time buyers (typically represented by the Millennial generation) has led to a preference to rent instead of buy. Rental properties will continue to be in high demand, and will be particularly strong in those cities with favorable job offerings in or near major metro areas, which is why these real estate investment companies are shifting their strategy to buy, hold, and rent to the public.
After the merger, this real estate investment company will own close to 50,000 rental properties across 22 states and have the advantage of significant capital and resources to purchase scores of rental homes. But this doesn’t mean that rental properties are out of reach for the average investor. In fact, smart investors across the globe are taking advantage of the single family rental market to add diversity to their portfolios and cash-in on the increased demand for rental properties.
The key for these individual investors is to look at secondary markets that offer higher yields. According to our Research Services team, in third quarter 2015, “Ohio claimed the highest yields in the nation” and “Pittsburgh also appeared in the top five after average yields climbed 440 basis points in the past 12 months, representing the largest increase in the nation.” Yet most of the nation’s wealth is within the low-yielding metros like San Francisco and San Jose. Therefore, to have the same advantage as the big investing firms, the average investor needs to move capital away from their home areas and into secondary metros that will maximize returns.