IRVINE, CA—Institutional investors have played a significant role in the residential real estate market recovery, buying up distressed single-family homes and either flipping and selling them or renting them out for profit. But the percentage of institutional investors in the single-family residential market has been dwindling recently, and with home prices rising significantly some institutional investors may feel it's time to cash out of the market, RealtyTrac reports.

“After nearly three years and hundreds of thousands of property purchases, the nascent single-family rental industry is at a crossroads in terms of future growth and long-term staying power,” according to the firm. “Many are wondering how many of the players will 'cash out' of their property portfolios given the strong home-price appreciation over the past few years—and if so, how that liquidation would impact local markets with a high density of single-family homes purchased as rentals.”

According to Chris Pollinger, SVP for First Team Real Estate, which covers the Southern California market, “We are starting to see institutional investors release their hold-and-rent inventory back into the market as prices reach near-peak levels.”

Despite the trend in some markets, RealtyTrac data shows very few of the large institutional investors involved in the single-family rental market are selling off in large quantities, but home-price appreciation has given those investors a good opportunity—and motivation—to sell and realize a solid return on many of their properties in many markets, the firm relates. “We analyzed more than 200,000 purchases made by institutional investors (10 or more purchases during a calendar year) from January 2012 through August 2014, evaluating the potential return investors could realize by selling these properties now.”

RealtyTrac's study revealed the following:

• On average, those 200,000 properties were purchased for $167,556 and have a current estimated value of $211,897, a potential gained equity return of 26% or $8.9 billion if all of those properties were sold.
• Institutional investors have the most motivation in terms of potential returns from gained equity on homes purchased in 2012, with potential returns ranging from 38% to 43%, depending on the month purchased.
• Four of the largest investors involved in the single-family rental market—which RealtyTrac tells GlobeSt.com are Blackstone (Invitation Homes), American Homes 4 Rent, Colony American  Homes and Fundamental REO—have a potential of $1.2 billion in gained equity, or a 23% return, on properties purchased in the last three years—and that is just among the subset of properties with sufficient sales-price and valuation information available.
• Markets where these big-four investors have the most motivation to “cash out” based on potential returns from gained equity include Chicago; Palm Bay-Melbourne-Titusville, FL: Orlando; Columbus, OH; Indianapolis; Atlanta; Jacksonville, FL; and Charlotte, NC.

Daren Blomquist, VP of RealtyTrac, tells GlobeSt.com, “I'd expect to see about a third of the big hedge-fund investors cash out within the next three years, and up to 50% cash out in the next five years. There will be a few players that stay in this market for the long term. Also keep in mind that cashing out does not necessarily mean the property goes into the hands of an owner-occupant. A large portion of the cashing out will involve the hedge funds selling to smaller investors who continue to hold the properties as rentals.”