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.
Third, the millennial generation, unlike the baby boomers, may just prefer to rent and have mobility rather than be tied down to a house and a mortgage. And single-family homes will be an attractive option for the swelling ranks of renters with families. So this is an investment that could yield a steady income stream, much like multi-family dwellings. KBW analysts also note an interesting advantage these REITs that own single-family homes have over other housing plays such as homebuilders and mortgage REITs. They offer a "hedge" against rising interest rates and tight mortgage credit. While such developments will likely hurt demand for housing, it will push buyers towards renting, benefiting single-family REIT operators.
According to the analysts, cash returns in the foreclosure-to-rental business could be in the 5-7% range, while total returns could reach 15-20%, with leverage. Some investors have already begun to attract funding, and if securitization of single-family rentals takes off, these returns could really be within reach.
A lot of 'Stupid Money' Out ThereStill, while the opportunity might be compelling, it isn't clear if the market is big enough to support many players. Frank Aronson, partner at Boston-based Posternak Blankstein & Lund, who specializes in real estate, is skeptical that the single-family rental market will be as big as some project. "It will shrink when housing gets better. The political ploy is always to raise the level of homeownership," he noted. "This is a sub-market with finite possibilities." Several institutional investors have rushed into the business over the past year and it isn't clear who the winners and the losers will be. "I strongly suspect there will be a shakeout of these companies," said Aronson.
Good Yield Is So Hard To Find
Institutional investors are already finding it hard to acquire properties at good prices. Most players are chasing the same properties in the same cities, creating bidding wars that automatically lower potential yield. Properties can be purchased in bulk only in places where there is abundant supply of foreclosed homes, so almost all players in the business are actively bidding in cities such as Phoenix, Las Vegas, Atlanta, Tampa and parts of California, which is why we are seeing a strong rebound in home prices in these markets.
Most players need to limit their buying to a few cities simply for operational reasons. Managing a widely-dispersed group of single-family homes is an operational nightmare. In the case of multi-family homes, a number of units are clustered into a single building, lowering the cost of maintenance. But imagine having to handle, say, the plumbing issues of a thousand homes spread all across Atlanta. "You need a management infrastructure that is much more diffused