The June 2015 Home Value Forecast (HVF) released by ProTeck Valuation Home Services on Thursday examines whether investing in single-family homes as rental properties is still a worthwhile investment as well as the criteria investors should consider.
ProTeck points out the flood of institutional investors who bought large quantities of single-family REO homes at a discount in the aftermath of the housing crash and subsequently made health profits by renting these properties. The single-family REO-to-rental market is being consolidated seven years after the crash as some investors are still looking to profit, while others are taking advantage of economies of scale. ProTeck concluded there will always be a need for rental properties, and there will always be a need for investors to purchase those properties.
Different investors use different criteria when analyzing markets to determine where to purchase their properties, according to ProTeck.
"Desirability of location, employment trends, rental yield, home appreciation and other factors should be used in some combination depending on risk tolerance, goal, and timeline," said Tom O'Grady, CEO of Pro Teck Valuation Services. "For example – an investor that is looking to sell a rental property after a few years would use different criteria than one looking for a long-term investment."
A few of the criteria investors use to make decisions on where to buy include price-to-rent ratio and rental yield, as well as a combination of rental appreciation, rental yield, and home appreciation data, according to a recent report by Deutsche Bank. That report found that the best markets for a single-family investor to turn a profit were those in which rental price appreciation was greater than home price appreciation. The top three markets based on that criterion were Providence, Newark, and Baltimore.
Citing data from SmartAsset, ProTeck examined three of the most expensive cities in the U.S. to live – San Francisco, Honolulu, and New York City – and found that home prices keep many people renting in these cities, which results in a large, stable rental market. Honolulu might be an especially attractive market to long-term investors due to low vacancy, high rent, and high appreciation, ProTeck found. Click here to view SmartAsset's complete study.
"Price-to-rent ratios, rental yields, and/or a combination of all including home price appreciation are all important criteria," O'Grady said. "Also, investors looking at five-year returns or different ten-year windows dramatically change the results, this is why all criteria must be analyzed to make informed investment decisions."
The decision on where to purchase properties in order to make the largest profits comes down to three criteria, according to ProTeck – investment goals, time frame, and risk.