As we continue to go through Morgan Stanley's “Housing 2.0: The New Rental Paradigm” we're more confident that 2012 will be a big year for real estate investors. For one, the financial services company boldly concludes, “…gross rents are historically attractive relative to current distressed prices. Adding to this attractiveness is the fact that multifamily data shows rents continuing to rise.”
This is a good indicator for real estate investments. Anyone who’s been active in the market clearly knows why rental properties have become precious assets among investors. And for the newbie, it isn’t that difficult to discover the logic here. A depressed housing market with very affordable properties means that demand for homes are down. This indicates that buyers opt to rent properties instead of buying a home. With this surge in rental demand, real estate investors are just as excited as everyone else who are poised to earn positive cash flows from their rental properties.
And the good news doesn’t stop there.
Additionally, Morgan Stanley makes a bold prediction about distressed property discounts, “…eventually when the distressed inventory returns to a more normal level, distressed prices should also converge toward their non-distressed counterparts. While not all of this convergence will be from the bottom up, a good amount of capital appreciation should still occur simply due to the magnitude of the current discount. Furthermore, as the distressed inventory is removed from the market, the overall housing environment should improve and eventually lead to fundamental home price appreciation as well.”
While there was no exact period mentioned as to when such a rebound will take place, savvy real estate investors know that their potential investments can eventually gain huge appreciation in value once the currently impaired market makes a turnaround. And Morgan Stanley suggests that they put their investment dollars in one sure-fire hit real estate asset – distressed single-family real estate.
Morgan Stanley suggests that real estate investors stick to the commonplace “location, location, location” mantra. So when you find that perfect investment property, keep in mind the following: rental laws, rent levels and its relationship to prices and incomes, employment and income trends, availability and cost of labor, insurance and tax requirements, and the property and environmental conditions. As you can see, it's not just the nearby shopping mall that influences location. If the property doesn't have any issue with these factors, you'll surely attract more tenants without compromising your rental unit's cash flow.
Finally, the report also mentions of two scenarios where the single-family rental model was used where Morgan Stanley found out that in terms of internal rate of return (IRR), “the opportunity is already attractive on an unlevered current yield basis, and made only more attractive by the addition of leverage and appreciation.” In other words, even with higher costs, longer vacancy in the property, and uncertainty in timing, there's more than enough reason to invest in single-family homes.