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Buy-To-Rent Market Predicted to Heat Up

Published on Friday - August 09, 2013

As predicted by Morgan Stanley, a leading financial service provider, the buy-to-rent market is expected to take a large step forward over the next several years. Affordable home prices will continue to allow investors to acquire discounted properties and rent them out to tenants who cannot afford to own. Increased investor activity is therefore expected to provide a boost to this particular industry.

Resting comfortably at approximately $17 billion dollars a year, the buy-to-rent industry has only begun to realize its potential. Experts at Morgan Stanly believe increased investor activity will expand the industry to its actual potential within a few years. Those who familiarize themselves with this particular market may reap significant rewards and stay ahead of the curve for a long time.

While prices are on the rise, homes are still well below their peaks in 2007. Values can be found across the entire country, as short sales and foreclosures are still relatively prominent. Investors may capitalize on discounted properties by renting them out to potential renters, increasing their monthly cash flow.

“We believe today’s ~$17B institutional BTR industry can continue growing and perhaps reach over $100B over the next several years,” said the latest Morgan Stanley (MS) housing research report. The analysts called the market a “sustainable business with a long runway for growth,” due to several factors.

Morgan Stanley has every reason to believe that the buy-to-rent ratios will increase exponentially. Primarily, expectations continue to trend upwards as homeownership decreases. The demand for homeownership is dropping and expected to continue. As we have seen with current market conditions, rents will increase as people find houses more unaffordable. In fact, institutional investors could rightfully anticipate a greater than 10% return on investments. While the distressed inventory is low, it is sizable enough to meet investor demand.

“Over the past three years, investor activity has removed significant amounts of distressed supply from Southern California, Phoenix and Las Vegas,” the report states. “Consequently, select MSAs in Florida, the Midwest and the Northeast now constitute a greater proportion of the nation’s distressed properties, making them potentially more attractive to institutional buy-to-rent investors.”

Investors interested in participating in the buy-to-rent market may get involved in several ways. Perhaps the easiest, and most well known method consists of investing in single-family real estate trusts. To a lesser extent, investors may also look to invest in mortgage lending companies. Buy-to-rent home prices will increase transaction activity. Such a practice can eradicate delinquent loans, lower expenses and boost home prices.

Another option, for investors interested in acquiring rental properties, is to invest in non-agency mortgage bonds that benefit from an institutional investor base. Doing so may provide the investor with a sense of security, as it lowers the risk of liquidation losses.

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