U.S Residential Real Estate – A Series Part 1 (US Market Update)

This 3 part series will provide objective and data-driven content on the state of select US markets so that potential investors can begin an investigation into acquiring US real estate from a relatively informed starting point.

US Market Update

At around the time Buying US Real Estate was published in 2012, US private-equity funds, hedge funds, real estate investment trusts and other institutional investors started buying single-family homes as rental stock. These investors have invested over $20 billion and acquired over 200,000 homes or about 10% of the total of 2 million homes purchased across the US. The top four investors are:

• Blackstone, doing business as Invitation Homes, with 45,000 units;
• American Homes 4 Rent, with 25,500 units;
• Colony American Homes, with 16,700 units; and
• Waypoint Homes, with 10,000 units.

Jonathan Gray, the head of real estate at Blackstone s real estate division, set out a business plan to buy homes in markets with economic and population growth and in which prices are depressed: California, Arizona, Florida, Georgia, Nevada, Georgia, Washington, Illinois, and Minnesota. Today, due to price appreciation and lack of supply, they have slowed or stopped buying in California, Arizona, Nevada, Illinois and Minnesota, although Invitation Homes continues to buy, albeit at a slower pace, in Florida (Tampa, Orlando and Miami), Georgia (Atlanta) and Washington (Seattle).

Investors in these markets use a common formula in determining the price they would pay for acquisition of product. For example, if a 10% return is required, based on gross rent, and the rent is $12,000 a year, the investor would pay $120,000 for the product less the costs of repairs and closing costs. If a 12% return is desired, the investor would pay $100,000 less these costs.

American home buyers entering the market with the help of realtors like Camden Mckay (https://camdenmckayre.com/rancho-cucamonga-homebuying-tips/) have apparently been a significant factor in the increase in property values. Other significant factors have been foreigners buying second properties and investment properties, and American investors buying homes for investment. Overall property values have risen over 24% from 2012. Investors who started buying properties prior to 2012 have seen even larger increases in appreciation. While some markets have become fully priced, such as Phoenix, there are still opportunities in other markets, as evidenced by institutional investor activity.

The remarkable thing is that institutional investors are creating a new asset class for investment as they do not propose reselling to home buyers. According to the Kroll Bond Rating, the wholesale secondary market is buying single-family rented homes portfolios at capitalization rates of 5.5% to 7%. Invitation Homes just recently issued nearly $1 billion in first mortgage bonds based on 75% loan to value, on 6,473 homes at an average interest rate of 2.04%. The other large investors are also issuing first mortgage bonds. At those low interest rates, these investors are getting, as you would assume, a nice cash flow from their properties.

What is also new is that funds have been created to provide mortgage lending to small investors buying homes for rent starting with loans of just $500,000 for the small portfolios. Their loan-to-value is 60% and they require a debt service coverage ratio of 1.2.

The home buyer who lost his home by foreclosure and has not owned a home for three years can purchase a home as a first-time buyer with a 3.5% down payment and obtain a mortgage from the Federal Housing Authority (FHA), the US equivalent of CMHC, which mortgage is guaranteed by the US government, at current interest rates of around 4% with a 30-year amortization and 30-year term, fully open. The credit score required by FHA is only 580. For credit scores of 500-579, the down payment is increased to 10%. In most areas in the US, excluding cities like New York City, Washington DC and San Francisco, it is cheaper to own than to rent, especially taking into account that interest payments on the mortgage and property taxes are tax deductible. For example a tenant paying $1,000 a month for rent would pay less by buying with a $150,000 mortgage at 5%.

However, there is still a market for investors to buy on a turnkey basis–that is, the property has been repaired, rented and the property is managed by a qualified property manager.

In Part 2 of this series I will examine the behavior of foreign purchasers in the US residential real estate market.

David Franklin, B.Comm, JD, has been practicing law in Ontario for over three decades, specializing in securities, mortgages, tax and real estate, and overseeing and transacting millions of dollars of transactions. Contact David at david@reincanada.com.

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