Hedge funds and other large investors do much better by buying up rentals in higher rather than lower income neighborhoods, according to a new report sponsored by RealtyTrac. The preference for pricey may be contributing to the deterioration and loss of low-cost rental housing, labeled grave concerns by the Harvard Joint Center for Housing Studies.
At first glance rental yields appear to favor lower income, or “core,” neighborhoods, when credit issues. Delinquency rates, eviction costs and collection times are factored on, investors make more money by owning and managing properties in upper square income areas.
Both price per square foot and rent per foot increased faster in the premium areas in the year ending July 2013, possibly due the slightly better affordability metrics demonstrated in the premium areas as well as some recent evidence of better credit availability for those areas, the analysis found.
Not only are investors doing better with rentals in pricier neighborhoods, the gap is growing with the housing recovery. The average price per square foot of premium homes, defined as those with a purchase price of $300,000 or more is increasing at a faster pace than the average price per square foot of a core home, giving investors a better prospect of a long-term return at the end of their holding period, even though in the short term the yields may be smaller on the premium homes, the study said.
Rents on premium homes are also showing some increase even while rents on core homes are flat lining.
Meanwhile, a recent study by the Harvard Joint Center for Housing Studies reported that the new, well-funded investors are concentrating on a few select markets.
“Although small-scale investors have traditionally owned the vast majority of single-family rentals, large investment pools began to buy up foreclosed homes after the housing crash to manage the properties as rentals. The largest of the group amassed portfolios of 10,000-20,000 homes, many of them concentrated in a few select markets,: the report said.
At the same, loss of rental homes in lower income neighborhoods is a critical issue making housing less affordable to those who can least afford it. The loss rate of housing built before 1960 is roughly 8 percent. Removal rates for single-family homes and two- to four-unit apartment buildings are also comparatively high. Fully 8.1 percent of rental units in non-metro areas were lost from the stock over the decade, compared with 5.7 percent in central cities and 4.7 percent in suburbs.
High losses in rural areas reflect the greater presence of mobile homes, particularly in the South and West where they account for more than 10 percent of rentals.