This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Single-Family REIT IPOs Are Risky Bet

Meanwhile, they are aggressively ramping up property purchases in an "arms race" fashion, hoping to build a large portfolio of homes before prices rise even higher.

But it takes time to refurbish homes and rent them out, which means occupancy levels in the initial years will be lower. That means lower cash flows and it means that investors buying these REITs will have to wait a couple of years before yields start firming up.

In some cities, the conversion of single-family homes into rentals has created more supply than there is demand for rental homes. KBW analysts factor in a 4% annual inflation in rent but it is not clear that all areas can pull off such significant rent increases.

A report from online company Trulia in April suggests single-family rents are already flattening in many markets. "Nearly 4 million more single-family homes have been added to the rental market since 2005. This new supply has fully caught up with the increased rental demand during the housing crisis - causing single-family home rents to flatten nationwide," the report noted.

Are REIT IPOs Worth The Risk?

Buying into a single-family REIT IPO is likely to be a high-risk bet at the moment, given that the business model is unproven and we don't have players with a well-established track record.

Investors who choose to buy into this need to be strong believers of the long-term story, says Scott Crowe, who heads a newly-formed real estate securities unit at Resource Real Estate. "Do you buy into the macro picture? -- Housing will recover, there will be a high propensity to rent and REITs will be able to penetrate this market."

Crowe believes REITs will be able to professionalize the single-family rental business -- historically the mainstay of mom-and-pop investors - in much the same way REITs have stormed the self-storage business that was once dominated by individual investors.

But even he is a little wary of the current crop of REITs hitting the IPO market.

For one, they are externally managed, which involves paying a fee to an outside company. Most externally managed REITs tend to trade at discounts because of concerns that manager and shareholder interests aren't aligned.
4 of 5

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
ARPI $15.89 -1.24%
BX $27.44 0.00%
CLNY $17.68 0.00%
OAK $48.31 0.00%
SBY $14.60 0.00%


Chart of I:DJI
DOW 17,773.64 -57.12 -0.32%
S&P 500 2,065.30 -10.51 -0.51%
NASDAQ 4,775.3580 -29.9330 -0.62%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs