REO-to-Rental - Good News for Investors - Understanding the Rental Yield Ratios and Other Important Economic Factors

by 06 Jun 2012

Home Value Forecast's Lessons from the Data explores how investors can make good returns renting properties until the market recovers

WALTHAM, Mass., June 6, 2012 /PRNewswire/ -- Pro Teck Valuation Services' (HVF) explores how to assess expected returns on Real Estate Owned (REOs) single family homes as rental properties.  In HVF's recently released Lessons from the Data, the authors examine the ratio of rent to home price values and other economic factors as valuable tools for an investment decision.  The rent-to-value ratio, also known as the "rental yield" is 12 months of rent divided by the home price. 

"With the emergence of the REO-to-Rental programs, investors must determine geographically where to find rental properties with acceptable rental yields as well as longer term price appreciation.  Looking at the Rent-to-Value ratio is a good first step in any due diligence," said Tom O'Grady, CEO of Pro Teck Valuation Services.

This month's Lessons from the Data evaluate the drivers and the variability of rental yields among different markets.  Some of the factors that lead to variations include: housing supply elasticity, lingering subprime effects, and risks correlated with the current rental yield.  

The authors demonstrate each of these factors with rental yield "heat map" examples in New York, Las Vegas, Atlanta, and San Francisco. 

The data suggests that the highest current yields are in elastic markets, such as Las Vegas, where the ease of adding new housing keeps home prices low and rental yields close to 14 percent.  However, in some metropolitan areas, such as New York, there are rather low yields (from below 2 to 7.9 percent) in many neighborhoods due to already constrained housing markets.  In Atlanta, the authors observe that there is a mix of high and low rental yields.  In some neighborhoods (generally southern Atlanta where prices have been held down by a higher ratio of distressed sales) the rental yields are quite high – up to 14 percent.  The higher current yields are correlated with the degree of subprime lending and high loan-to-value mortgages in these markets.  But the rental yields are as low as 0 to 1 percent to the north of the city where distressed sales are not as common.   

In addition to rental yields, investors also are advised to look at fundamental drivers that indicate whether a home's value will appreciate.  Such factors include vacancy rates, rental rates, months of inventory on the market, price trends and amount of distressed sales in the area.  Longer term drivers of future home value appreciation include mortgage rates, household income and employment growth. 

"Other factors including the property's carrying costs (yearly cost for maintenance, insurance, taxes, etc.) and expected appreciation should be explored to gain a clearer picture of a property's income potential.  However, the rental yield by itself, like the classic earnings to price ratio, is not a guarantee for a successful investment. It is necessary to look carefully 'under the hood' at other considerations," added O'Grady.


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