Investors bought about 66,780 homes in August, the highest since the beginning of the foreclosure crisis, according to Bloomberg calculations based on National Association of Realtors data. Investors' share was 18 percent of sales. About 90 percent of those homes went to people with fewer than 20 properties, Yun estimated.

"Some people are making an indirect real estate play by investing in funds that buy foreclosures to rent, but most of the demand is from small-scale investors who live in the community," Yun said. "It provides a decent rate of return for them because rents are rising and prices are still low."

The average U.S. rent rose to a record $1,086 a month in the third quarter, a gain of 3.3 percent from a year earlier, according to MPF Research in Carrollton, Texas. The vacancy rate fell to a 10-year low of 8.6 percent in the second quarter, according to the Commerce Department. There are about 40 million rental units in the U.S., compared with 75 million owner- occupied homes.

'Risky Move'

For individual investors, "the demand is there, but it's a risky move if you are putting all your eggs in that one basket," said Greg Willett, director of research for MPF.

Even with rent gains, buyers of distressed properties to rent would need to get a discount of about 30 percent to get a yield of 8 percent, said Paul Diggle, a real estate economist for London-based Capital Economics Ltd. If investors are looking for 12 percent yields, they'd need to get a 50 percent discount, he said.

The simplest way to calculate yield is to subtract expenses from annual rent and divide by the cost of the property. A $125,000 home will yield about 8 percent a year if a tenant pays $1,200 a month in rent and monthly carrying expenses are $400.

That formula doesn't account for the time a landlord may spend responding to disgruntled tenants and repairing burst water pipes, broken furnaces or leaky roofs, Diggle said. Many homes in foreclosure are neglected, which could lead to maintenance problems down the road, he said.

'Sweat Equity'

"Small-scale investors may actually run at a loss on rental housing if their sweat equity is accounted for," Diggle said.

Yovaldi Venter, a first-time real estate investor, is buying a foreclosed property using money from her retirement funds. She said she plans to buy her first property before the end of the year after transferring some of her 401K into a self- directed IRA this month.

Her target: a duplex on the south side of Jersey City priced at $60,000, a fifth of what it went for in 2008 when it last sold. Its two rental units bring in $2,000 a month, according to Venter, 45.