One of our clients asked an interesting question yesterday that I think worthy of some discussion here:
“Has Adaptive done any single family home deals where the rental numbers would work out to at least cover PITI after fixing up the property?”
In other words, can you buy a single family home as a rental and at least break-even?
The answer is “No”, and here’s why:
In LA, there is a massive single family home ownership premium. By this we mean: People are willing to pay prices for homes which result in monthly payments that are far in excess of what the property can generate in rent.
This is (somewhat) rational, because home prices have tended to rise faster than inflation, so there is a reward for speculating, which is being priced in.
Because of this effect, it is extraordinarily difficult to find a single family home rental deal that breaks even. At this stage of the cycle, the only areas where this might be possible would be areas which are really, really bad (eg where no one else wants to buy and so there is little / no home ownership premium).
Interesting side-note: In 2009-2011, when there were tons of foreclosures and not many buyers, the home ownership premium in many improving areas almost disappeared, allowing investors to buy and rent single family homes and get some kind of yield.