Small investors follow big bucks in single-family rentals in Arizona

Property for sale in Scottsdale, Arizona.Engel & Volkers

Seeking cash for small rental investors, two Vancouver real estate agents suggest buyers look away from the coast and mountains to the desert of the American Southwest.

“A lot of our clients are firefighters or teachers, doctors or lawyers, and some don’t want to get into crypto or the stock market,” said Amy Leong, business advisor at Engel & Volkers Vancouver who, with her business partner Ally Ballam, opens a satellite office in Scottsdale, Arizona. Some of their clients have built up equity during the two-year rise in residential real estate prices and are sitting on $500,000 or $1 million, she said. “They have dinner conversations saying it would be really nice to be able to buy a vacation home or a family joint venture…they want to own property across the border.”

The biggest challenge for property investments in their home market is the cost of ownership versus potential rental income.

“Real estate in British Columbia and Vancouver appreciates very well over time – you see it as a long-term investment. But if you pay a deposit of 20 p. 100, it’s very hard to find anything that generates cash in Metro Vancouver. That’s what I see myself working with clients,” said Johanna Williams, client of Ms Leong and Ms Ballam and mortgage specialist at Royal Bank of Canada. By “cash flow,” she means the rent covers the mortgage and other costs and still adds money to your bank account every month.

While home values ​​in Arizona jumped 33% year over year in April, the average selling price was just US$569,752.Engel & Volkers

It turns out that one of the most dynamic trends in real estate investment in the United States – the growth of single-family rental housing portfolios held by large institutional investors – has revealed that there are places like Arizona where home values ​​are relatively low and rents are high enough that cash flow is not an issue.

“It’s a more accessible market to break into, certainly than a California or a Seattle,” said Kenneth Perlman, managing director of John Burns Real Estate Consulting which focuses on the Southwest market. “Institutional investors are big in this space, they love SFR, and they are all about the Built for Rent space [where a developer creates an entire low-rise subdivision to be managed by rental companies], which is the hottest segment of the market. They want returns and, if there is inflation, rents go up.

One of the biggest institutional players in this space is also a Canadian investment firm: “Tricon Residential is one of the largest operators of single-family rental homes in the country,” Perlman said, with 35,000 homes under management. “The three public single-family REITs – Tricon, Invitation Homes and American Homes 4 Rent – own and manage nearly 171,000 homes nationwide.”

Data from John Burns suggests that the portfolio of single-family homes held by institutional capital is around 3% in the United States, but Arizona is ground zero for the market where it is closer to 10%. A big driver of this activity is a region with a pleasant climate that remains undervalued compared to other major centers.

“What we bought in Arizona for $700,000 would be $3 million in Vancouver,” said Zia Hirji, an investment adviser who owns a rental condo in Vancouver but recently purchased another home in Arizona on which he is signed up. Airbnb.

According to the Morrison Institute for Public Policy at Arizona State University, rents for some one-bedroom apartments in the Phoenix area have more than doubled since 2020.Engel & Volkers

While Arizona home values ​​jumped 33% year-over-year in April, the average sale price was just US$569,752 (according to data from the Arizona Regional Multiple Listing Service ), which translates to C$717,261 and remains below the Greater Vancouver average of $1.35 million (up 35% from 2020).

Two years ago, Ms Williams bought a pre-construction townhouse in Langley, British Columbia, as her first investment property, but plans to sell the never-occupied home and go shopping in Arizona. “Our house probably went up half a million in value in two years,” she said. “When we started looking [in Arizona] we saw it was US$650,000 for a low-end, detached single-family home with a pool, now it’s like US$850,000, that’s C$1.07 million. It’s not much cheaper than here, but we couldn’t buy a million dollar house here and be cash flow positive,” Ms Williams said.

Certain demographic factors can drive up Phoenix rents: 36% of area households are renters (down from all-time highs of 38% in 2014) and the median age of the population is 34 (72% of U.S. renters are 44 and under). According to the Morrison Institute for Public Policy at Arizona State University, rents for some one-bedroom apartments in the Phoenix area have more than doubled since 2020.

According to the National Association of Realtors, Canadians remain the largest share of international buyers of residential real estate in the United States, despite a declining share in recent years.Engel & Volkers

And there are also other advantages for small owners. A lease in Arizona can be drafted to allow the landlord to increase the rent at any time with 30 days notice, and if there is no such provision in an existing lease, landlords only have waiting for a new tenancy to begin. And because the state also has no “just cause” requirements for eviction, at the end of a lease, a tenant who has done nothing wrong (like not paying rent or commit crimes on the premises) may be evicted and rents increased for the next resident.

If you’re a local, the result is a frustrating housing shortage where homeownership costs are rising faster than rental costs. For an investor with money to buy, there is an opportunity.

Rents for single-family homes are up about 12.5% ​​year over year, according to the most recent data from March, Perlman said. “If you look at home ownership, payments on an entry-level home are up 40% [largely due to rising interest rates]. This means that it costs 25% more to own an entry-level home than to rent it.

Perlman says he found little evidence of any significant growth in the number of Canadians flocking to invest in Phoenix, even though it remains an important nesting ground for snowbirds.

According to the National Association of Realtors, Canadians remain the largest share of international buyers of residential real estate in the United States, despite a declining share in recent years. In 2020-21, Canadians purchased 8,800 U.S. properties for a total of $4.5 billion, or 8% of international purchases. Florida is still the number one destination, with 38% of purchases, but Arizona comes second with 24% (well above California’s 7%, third).

Rents for single-family homes rose about 12.5% ​​year over year, according to the most recent data from March.Engel & Volkers

Ms. Leong says there is an opportunity for growth, not least because less than 20 years ago, following the 2008 financial crisis, Canadians typically accounted for 23% of the market, spending more than $12 billion. for over 40,000 properties in the United States each year.

“I’ve personally done the same thing, bought a few houses in Arizona,” said Ms. Leong, who listed them on Airbnb when she wasn’t using them herself. “From October to May, our houses were full.”

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