The Future of Residential Income Asset Yield: The Shift from Traditional Multifamily

by Tim Leber, Relationship Manager

The Beginning of the Shift:
The single-family rental market is one that has given some of the more institutional lenders heartburn over the past couple of years. In the post-recession world that has investors and lenders scrambling to realize the huge demand for large multi-family development and investment, there has been a growing number of small-cap and high net worth investors that have taken a big risk by finding ways to make money off what was considered the primary cause of the debt bubble. The most obvious way to capitalize off the housing crisis was to invest in core market multi-family. With a significant number of families being foreclosed upon, and credit not strong enough for a new mortgage, the rush to multi-family created a development boom with a corresponding rush for new investment capital. The only problem was that the demand for single-family homes and condominiums hit such a low that the investors were picking them up for 50% or less than pre-recession prices. The all-cash investors buying these homes were doing it at such a discount that putting in tenants at low rents didn’t matter because there was no debt service to support.

Change in Consumer Thinking:

Investors found that there was more to this shift in residential preference than simply the inability to afford a home or have the credit necessary for an agency mortgage. The recession taught many of these large scale SFR investors that their exit wasn’t simply an appreciation play. There seemed to be a demographic shift from home ownership as a staple, to residents wanting all the perks of home ownership, without the anchor that comes with it. Many consumers at the prime home-buying age with enough income and strong enough credit to support the purchase of a home just didn’t want the anchor of a home mortgage and the maintenance costs associated with home ownership. It is much easier to pay simple monthly payments to a landlord and have them deal with the variables and issues that come with property ownership. A home used to be considered an ‘investment’, but outside of potential appreciation (and no market dip) the home is now viewed as a recurring cost – money for debt service and maintenance. This shift in thought has driven a huge demand for rental homes in desirable markets within middle class families.

Out-of-the box Investing:

Just because the market has begun to tick upward and home prices have rebounded in major markets doesn’t mean that the opportunity to capitalize on shifting trends has dried up. Desirable markets outside of the core urban centers are starting to see rents being driven higher for condos and single-family rentals either through an influx in population or through economic drivers. Looking at some states out west, there is a massive outflow of well-educated young professionals moving to neighboring states as businesses are being pushed out by high taxes and high cost of labor. Markets capturing the outflow of business from California into areas such as Reno and Las Vegas in Nevada and even as far away as Phoenix and Dallas have experienced a strong growth in rental rates that are being captured by single-family and condo rental investors.

The Search for Yield:

Pursuing 4 caps in core markets seems to be the battle everyone has embroiled themselves in for the multi-family financing space and speaks volumes to the type of investment market we are in for a space that has seen a non-stop upward swing. The returns achieved on such assets after placing even remotely competitive debt on the property are slim, and many assets are purchased as a long-term appreciation play or for very long-term cash flow. The more active investment groups are not going to continue to settle for such slim margins, and we are starting to see a shift into the fractured condominium space and single-family markets as it is difficult for certain groups to hit the required returns on core multi-family. Debt may be slightly more expensive, but the high cap rates on multi-site single-family rental pools can provide double the margin found in traditional multi-family.
 

 
CoreVest is a leading provider of financing solutions to residential real estate investors. We provide attractive long-term debt products for stabilized rental portfolios as well as credit lines for new acquisitions. For more information about how Corevest can help grow your rental and rehab business, please call Tim Leber at 949.344.7889 or email [email protected]

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