An interesting trend is establishing itself in early 2013 with respect to residential rental properties.Â Private equity firms and otherÂ institutionalÂ investors have raised $6 billion to $8 billion to invest in foreclosed single-family homes nationwide.Â The enormous amount of institutional capital that is now being directed into the rental market reflects the ever-growing need for homes amongst the changing demographics of the U.S. population.Â
New housing supply in the U.S. is estimated to be 60% below historical averages.Â Private equity firms focusing on increasing yields are betting that the housing recovery is an optimal way to do just that.Â
As competition heats up for any available properties between institutional investors and the small individual investor, both sets of investors need to be wary of cap rate compression now occurring in many markets.Â Individual investors really need to do their due diligence with respect to long-term factors such as location and realistic operating expenses.Â As more money floods the market, obviously prices begin to rise, making a lower cash yield a definite possibility.
2013 will be the year of a new asset class of residential rental properties as the institutions and privateÂ equity firms begin to actively spend the billions of dollars that they spent last year accumulating. It is still a great time to buy investment property but greater caution than ever is now required.