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» VISIT US ONLINE @ DSNEWS.COM MARKET PULSE With demand and prices for rental properties in an upward arc, savvy investors are finding profit-making potential (quite literally) at their doorsteps. D ifferent types of investors are increasingly finding their way to the rental housing market, especially the single-family-home sector, and finding opportunities that may extend well beyond the end of the foreclosure crisis. Figures from many sources show growing demand and rising prices for rental housing and broad opportunity for investors. The National Multi Housing Council's membership survey shows fewer apartment vacancies and higher rent increases in recent years. Rental vacancy rates in the United States dropped about 2 percentage points in the last two years, according to Freddie Mac. The GSE also reported in a recent U.S. Economic and Housing Market Outlook that the number of households in rentals increased 4 percent, or 1.5 million, during the 12 months ending in March. On the multifamily side, starts of buildings with at least five apartments in the January-toMay period jumped 48 percent from the same period last year. According to Frank Nothaft, Freddie Mac's chief economist, rental demand is likely to continue increasing in the next year, and vacancy declines, rent gains, and property value improvements could continue as well. Differing Groups, Differing Goals Chris Clothier, chief executive of Memphis Invest, says he sees investors in the REO-torental market split into two camps. The first group got involved during the last 24 to 36 months and has more average, everyday, do-it-yourself investors, says Clothier, whose firm advises clients on real estate investing. In this group, investors typically have specific investment goals in mind, such as passing wealth on to their families or saving for college or retirement. They may seek out investment opportunities outside of those offered by traditional brokerage houses, because they want more control over their investments, Clothier says. "They're taking a piece of their investing into their own hands," he said. The second group of investors are more sophisticated and have very liquid assets, Clothier says. They started investing in the REO-to-rental space more recently as they perceived housing prices bottomed out or will quickly. He says he expects the REO-to-rental market to have another three to five years of potential still to come. "Nationally, I think there's definitely the perception out there that we are at the bottom," Clothier said. "If we're balancing on the bottom, that's fine; maybe there's a couple of years left." Investors in the second group have more assets, they're experienced investors, and they're familiar with real estate markets from investing in real estate investment trusts, or REITs. They're very liquid, and they want bigger portfolios—10 to 25 properties—than the four- or five-property portfolios sought by investors in the first group. Investors from the first group are typically looking to buy single-family rental properties for the long term—a portfolio they might pass on to their children. In the second group, members are attracted purely by the investment opportunity. "They have the same objective, but they will get out in a heartbeat if they feel the [property price] appreciation isn't there," Clothier said. Investors in the first group usually need help finding the right company to manage their properties, he says. "The do-it-yourself investors don't want to get their hands dirty. They don't have to swing the hammer, collect the rents, or clean the toilets themselves," Clothier said. Squeezing Out the Little Guys In some markets, Clothier says, the enthusiasm of the second group drives costs too high and, consequently, excludes the do-it-yourself investors. Eric Lichtenheld, president of Integra Group in Tucson, Arizona, says he sees the enthusiastic buying by investors in general as squeezing out potential owner-occupant buyers. Integra manages and markets REO properties in Southern Arizona, and its clients include four of the 10 largest U.S. mortgage lenders. Lichtenheld says his larger clients put more of an emphasis on fully repaired strategies for their properties, which puts them in good corporate citizen standing and makes the properties eligible for Federal Housing Administration (FHA) financing. Eligibility for FHA financing gives a property a much larger group of potential buyers. Those clients even do full repairs to smaller houses—one bathroom, two bedroom, 900 square feet, for example— that Integra would typically recommend marketing to investors as a rental property with no repair before the sale. When selling REOs, most banks entertain offers, then plan a "highest and best" round to try to get better offers and then plan more highest-and-best rounds, Lichtenheld says. For homebuyers, the constraint for offers is the appraised value of the property—FHA won't finance for more than the appraised value. So if the offers exceed the appraisal, the homebuyer is squeezed out. Sellers are also attracted by the cash nature of investor offers, which also squeezes the 57

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