For decades or even centuries, investors have purchased multifamily, commercial, and office properties for the purpose of generating positive yield from renters. Such multi-unit properties offered economies of scale because servicing multiple tenants in close proximity to one another is manageable with just a few employees, property managers, or maintenance professionals.
Several posters have mentioned that both REITs and private equity have been buying up single-family residential properties across the nation for the purpose of becoming landlords (and possibly eventual slumlords if properties are not maintained adequately). I have personally observed this on a broad scale in the sub-$300,000 price category of “starter homes” and townhouses whenever new units are built in areas with strong rental demand.
Suburban and exurban (semi-rural) single-family homes are not usually as economical to manage as multi-family and commercial properties might be, because single units require more employees or agents per unit to achieve a high level of attention to maintaining cashflow.
My “back-of-the-envelope math” calculations reveal that the new home developments I have seen purchased in bulk are located in exurban (far suburban) areas where average rent for a 3BR 2BA home is at least $1,800/mo for a $300,000 property. Purchases of such properties produce a starting yield of 7%+ before taxes, insurance, maintenance, HOA fees, and rental agent commissions.
More recently, the demand for income-producing real estate has progressed from exurban starter or move-up homes by institutional purchasers to luxury properties being acquired by individual investors in suburban areas with good schools. Obviously, investors and rich individuals are sitting on so much cash that there are few options for generating yields anywhere near the inflation rate.
In my own gated neighborhood, a 5,500 SF home was recently purchased by an individual for $1.14 million and promptly put on the rental market for $5,500/month. The purchaser of this property will realize a yield of a little less than 5.8% before taxes, insurance, maintenance, HOA Fees, and rental agent commissions.
With today’s 8% inflation, the landlord will be losing purchasing power, but my guess is they are expecting price appreciation to make their investment break even with inflation or to do better.
Having experienced a few of my own “tenants from he11” in single-family rentals, I sincerely hope the institutional and individual owners of these houses have taken the risk of cash flow interruption into account.
If the economy falters, then single-family home investors should include in their pro forma calculations the cost of attorney fees, eviction, and collection from intransigent tenants who fail to pay their rent or who abuse properties, causing an interruption in cashflow and substantial out-of-pocket costs for repairs and restoration of damage caused by bad tenants.
There’s still an awful lot of cash chasing yield.
