NEW YORK ( TheStreet) -- The business of buying single-family homes and converting them into rentals is not just a short-term, opportunistic bet on rising home prices.
It is a sustainable business model that could grow into a $100 billion market opportunity over the next few years from $17 billion currently, according to analysts at Morgan Stanley.
Single- family rentals is not a new business. According to analysts at KBW, from 1973 to 2011, single-family rentals constituted 10-12% of occupied housing and 31-35% of occupied rentals.
But this has been a unique period of opportunity for investors in the single-family rental space. A historic level of distressed homes for sale, price declines that have made housing remarkably cheap and high demand for rental units amid constrained credit conditions have combined to create an unprecedented opportunity for investors to buy vacant, foreclosed homes in bulk and rent them out.Institutional investors with deep pockets have swarmed into the business, with private-equity player Blackstone (BX) leading the charge. But the untested business model and the considerable operating risk have many doubting the sustainability of the trend . Housing bears fear that these big investors will pull out of the housing market once competition increases and returns dry up and first-time homebuyers and trade-up buyers who have been squeezed out of the market may still not step in to fill the void. Morgan Stanley is optimistic, however. For one, they expect homeownership to continue to decline for the next few years and the renting class to increase. Converting distressed stock to rentals will help meet this growing demand. Secondly, while the yields currently are modest at 5% to 6% after capex, home price appreciation will augment cash flow yields, driving a return on capital to above 10%. Moreover, the analysts expect margins to expand over time. Rents should climb 3% to 4% while expenses grow by a slower 2%. Another big driver would be financing. The Wall Street Journal
Select the service that is right for you!COMPARE ALL SERVICES
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV