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Single-Family REIT IPOs Are Risky Bet

NEW YORK ( TheStreet) -- The big money on Wall Street has been busy snapping up foreclosed single-family homes at bargain prices for cash and converting them into rentals, in many cases crowding out mom and pop real estate investors and first-time home buyers.

Now they are finally offering you, the average Joe who just can't seem to get a mortgage in this market, a chance to participate in the nascent housing recovery.

A number of operators of so-called single-family rentals are seeking to raise money from the public as real estate investment trusts or REITs.

REITs are required to earn their income stream primarily from real estate and must distribute at least 90% of their taxable earnings as dividends. As REITs, they are permitted to deduct dividend from corporate taxable income and many REITs choose to distribute almost their entire taxable earnings so that they owe no corporate tax.

These investment vehicles have become increasingly popular with retail investors in recent years as they offer rich yields in a low interest rate environment.

Single-family rental operators who have mushroomed over the past year are increasingly adopting the REIT structure as it enables them to get access to a lower cost of capital compared to, say, private equity funding.

Silver Bay Realty Trust (SBY - Get Report) was the first single-family REIT to go public in December. American Residential Properties (ARPI - Get Report) raised $287 million in early May.

In the last few weeks, Waypoint Homes Realty Trust managed by Oakland, California-based Waypoint Realty Group registered an IPO filing for $100 million.

Colony Capital (CLNY - Get Report) is also listing its single-family REIT Colony American Homes, which plans to raise another $245 million.

These companies are being promoted as high-yielding REITs that could also provide an upside from rising home prices.

But with an unproven business model and a lack of comparative benchmarks in the market, they remain a risky bet.

A Unique Play on the Housing Recovery

Single- family rentals is not a new business. According to analysts at KBW, from 1973 to 2011, single-family rentals constituted 10-12% of occupied housing and 31-35% of occupied rentals.

But this is a unique period of opportunity for single-family rentals. A historic level of distressed homes for sale, price declines that have made housing remarkably cheap and high demand for rental units amid constrained credit conditions have combined to create an unprecedented opportunity for institutional investors to buy vacant, foreclosed homes in bulk and rent them out.

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