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Here's How Declining Landlord Profitability Benefits the Rental Market

by devteam January 3rd, 2014 | Share

While investors placing their money andrnhopes on single family houses is not a new phenomenon, CoreLogic in its currentrnissue of MarketPulse, says it was anrnimportant one in the successful recovery of the housing market.  What was different about single familyrninvestment post-recession was the “aggregation and professional management ofrnlarge portfolios of properties and, most importantly, the availability of institutionalrninvestor capital to fund the acquisition of properties.”  </p

CoreLogic’s chief economist Mark Fleming,rnin an article titled Slow Money is Replacing Fast Money, asks “Wherernwould prices be today if investors had not been willing to buy distressed propertiesrnin the dark days of the housing market just a few years ago?”  But now he says the market is changing.  </p

The maturation of the market combinedrnwith rising home prices is challenging the profitability of large scalernsingle-family investment.  To demonstraternthis Fleming computed rental cap rates for a number of markets where this typernof investment was a significant activity in both 2012 and 2013 using August-over-Augustrnrates as that month signals the end of the home-buying season.  </p

Fleming used market-level single-familyrnrental rates, assumed one-month’s vacancy, one month’s leasing costs, an 8rnpercent management fee and 2 percent maintenance.  Acquisition cost was based on the averagernsingle-family sales prices discounted 30 percent under the assumption it was arndistressed sale and assuming a 5 percent cost to rehab.</p

Out of the 10 markets Fleming examined eightrnhad declining cap rates with only Charlotte, North Carolina and Houston increasing.   The declines,rnFleming said, were largely due to the increase in home prices outpacing anyrnincreases in rents.  Nonetheless, thernimplied return he said is still strong, especially if one factors in capitalrnappreciation from rising home prices.</p

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About the Author

devteam

Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

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