Moving beyond the current situation, the long-term argument for single-family rentals is that Americans will increasingly rent homes rather than buy them. For one, new regulations will make it much more difficult for homeowners without strong credit scores and a substantial downpayment to get a mortgage in the future.
Second, with millions of borrowers underwater and
unable to sell, supply will remain constrained and force people to rent.
Third, the millennial generation, unlike the baby boomers, may just prefer to rent and have mobility rather than be tied down to a house and a mortgage.
And single-family homes will be an attractive option for the swelling ranks of renters with families. So this is an investment that could yield a steady income stream, much like multi-family dwellings.KBW analysts also note an interesting advantage these REITs that own single-family homes have over other housing plays such as homebuilders and mortgage REITs. They offer a "hedge" against rising interest rates and tight mortgage credit. While such developments will likely hurt demand for housing, it will push buyers towards renting, benefiting single-family REIT operators.
According to the analysts, cash returns in the foreclosure-to-rental business could be in the 5-7% range, while total returns could reach 15-20%, with leverage. Some investors have already begun to attract funding, and if securitization of single-family rentals takes off, these returns could really be within reach.