There is a new investment opportunity that has been getting increasing amounts of attention in the financial press and investment community. Buying single family homes to rent may be turning into an attractive option for individual investors seeking decent yields in a low interest rate environment. Some institutional investors like hedge funds and private equity funds have been investing in this new asset class, and as of a few months ago, individual investors now have the opportunity to invest in the asset class via two new REITs (SBY, RESI), with more on the way. There are others active in the space as well including Canadian (TCN.T) and Australian (URF.AU) public firms, as well as publicly traded private equity firms (BX, OZM), along with home builders (LEN and BZH partnered with KKR).

This new real estate asset class has the potential to help alleviate multiple problems.

1. Home prices dropped sharply after 2006/2007 resulting in mass foreclosures, underwater homeowners, mortgage and related fixed income losses, and negative impacts on the economy.
2. With record low interest rates, retired investors and savers are looking for reasonable yields.
3. To support the housing market, the US Government (through numerous entities including Fannie Mae, Freddie Mac, and FHA) has taken a larger role in supporting housing, yet many would like to see that footprint reduced substantially.

There have been many informative articles and financial disclosures from public companies, so there is no need to re-write the story. Instead, I've created a collection of firms apparently active in the space, quotes, excerpts, and links on the subject.

Quotes and excerpts

• "The business of buying-and-renting houses, long dominated by local mom-and-pop investors, has morphed over the past two years into one of the hottest investments on Wall Street."

  2/20/2013 - Foreign Buyers Hop on Rental Trend (WSJ)

• "This is the best new opportunity in pension fund investing in real estate in a very long time."

  2/13/13 - Paul Saylor in Billionaire Hughes Chasing Blackstone as U.S. Rental King (Bloomberg)

• Whether the single-family rental market grows from “a $10 to $20 billion market to a $100 to $200 billion market” will depend “on how successfully institutional investors are able to execute over the next few years

  2/13/13 - Sandeep Bordia in Billionaire Hughes Chasing Blackstone as U.S. Rental King (Bloomberg)

• The single family rental market was large even before the housing crash, with sixteen million homes designated as rentals in 2010, according to the U.S. Census. Add to that at least five million foreclosures, many of which will become investor-owned rentals, and the enormous scale is apparent.

  1/9/2013 Meet America's New Landlords: REITs (CNBC)

• By some accounts, $6-9 billion has been raised or committed, suggesting potential acquisitions of 40,000-90,000 properties ... We expect the REO-to-rental market to experience robust growth over the next 12-24 months, potentially emerging as an institutional asset class.

  1/9/2013 - Jade Rahmani in Meet America's New Landlords: REITs (CNBC)

• While mom-and-pop businesses have been buying, renovating and renting out homes for years, major investors backed by private-equity and hedge funds only began amassing single-family homes within the past couple of years.

  9/17/2012 - Boost for Foreclosure Market (WSJ)

• Investors can buy stakes in malls, apartment towers, timber forests and even cellphone towers through real-estate investment trusts. Now, add to the list: single-family homes transformed into rental properties.

  5/8/2012 - Builder Is Constructing REIT for Home Rentals (WSJ)

• "Its the right thing not only for our investors, but the country at large"

  Blackstone Invitation Homes video

Prominent organizations publicly identified as active in the asset class

1. Blackstone Group (BX) (Invitation Homes platform) has spent $3 billion on rentals (Blackstone said last month it spent $2.7 billion on 17,000 properties) and plans to continue ramping up those efforts in 2013. Source1 2/4/2013 (Money), Source2 2/4/2013 (Alternet), Source3 12/9/2012 (NYT)
2. Wayne Hughes and American Homes for Rent owns 10,000 single-family houses (Arizona, Georgia, Nevada, Texas, Illinois and Indiana, according to American Homes 4 Rent’s website, also bought houses in Colorado, North Carolina, Florida, Ohio and California per RealtyTrac). The majority of homes it bought in 2012 were through foreclosure auctions. Plans to go public (2/27/2013). Source 2/13/2013 (Bloomberg)
3. Colony Capital LLC (Colony American Homes), headed by Thomas Barrack, has bought more than 8,000 homes and hopes to reach 10,000 by next spring. Source1 12/9/2012 (NYT) Source2 9/17/2012 (WSJ)
4. Waypoint Homes owns more than 3,000 rental homes (California, Phoenix, Chicago and Atlanta areas) and expects to have 10,000-11,000 by the end of 2013 (Citigroup extended a $245 million line of credit and GI Partners, a private-equity firm, invested $250 million in Waypoint). Source 9/17/2012 (WSJ)
5. Silver Bay Realty Trust Corp. (SBY) an arm of Two Harbors Investment Corp. (TWO), raised $245 million in an initial public offering in December and acquires, renovates, leases and manages single family homes. Acquired portfolio of Over 3,400 Single-Family Properties and the Company achieved an occupancy rate of 96% and an average monthly rent of $1,148 on 1,779 properties that were stabilized as of December 31, 2012. Previously, SBY had purchased more than 2,500 homes in areas hard hit by the housing crisis and in an SEC filing said that it plans to purchase 3,100 more homes. Source1 press release 2/28/2013, Source2 2/20/2013 (WSJ) Source3 2/4/2013 (Money)
6. Tricon Capital Group Inc (TCN.T) a Toronto-based asset manager, launched a single-family rental investment platform in early 2012 and has since spent $160 million acquiring nearly 2,000 homes (California, Arizona, Florida and North Carolina) and it hopes to own between 3,000 and 4,000 homes by the end of 2013. Source 2/20/2013 (WSJ)
7. American Home Real Estate Investment Trust owns close to 2000 properties in Georgia, North Carolina and Florida, and plans to continue buying more. Source 1/9/2013 (CNBC)
8. Altisource Residential Corporation (RESI) has 1,500 rental homes in five states. Source 2/13/2013 (Bloomberg)
9. Delavaco Properties (Toronto-based) began buying foreclosed homes in the U.S. in 2010, and renting them out to tenants, 68% of whom use Section 8 vouchers, a federal rent-subsidy program for people with low income. So far, Delavaco has bought 557 single-family homes in South Florida, and according to the firm's website, plans to own 1,500 by the end of 2013. Source 2/20/2013 (WSJ)
10. Rialto Capital Management LLC, a unit of Lennar Corp. (LEN) that invests in distressed debt, has rented out some of the 300 single-family homes it has acquired from buying distressed loans from the Federal Deposit Insurance Corp. Source 3/20/2012 (WSJ)
11. Beazer Pre-Owned Rental Homes Inc., a unit of Beazer Homes (BZH) along with Kohlberg Kravis Roberts & Co. (KKR) announced plans to form a REIT which eventually plans to go public (after the company's assets reach at least $150 million). It hopes to expand beyond Phoenix and Las Vegas to at least one other. Within two years, Beazer said the number of rental homes under the new REIT's control could number in the thousands. Beazer contributed the 192 homes, which have a market value of about $20 million, to the new company, and KKR (KKR), along with other investors, has contributed another $65 million. (Source 5/8/2012 WSJ)
12. The hedge fund manager Och-Ziff Capital (OZM) is already starting to sell the single-family homes it bought since the recession began. Source 12/9/2012 (NYT)
13. US Masters Residential Property Fund (URF.AU) raised $276 million with a primary strategy of investing in direct US residential property. Source 2/20/2013 (WSJ)
14. Cashel (partners with an Australian investment bank) has bought 200 homes and hopes to expand to 2,000 homes in the next 2˝ years. Source 2/20/2013 (WSJ)
15. American Residential Properties Inc. said on Dec. 5 that it probably will file this quarter to go public. Source 2/27/2013 (Bloomberg)

Discussions and projections for expected returns

• The kind of apartments sought by institutional investors, usually properties with 50 units or more, are priced to deliver internal rates of return, a measure of investment yield used by private equity firms, of almost 7 percent, according to [Ray] Huang [Green Street Advisors]. Return expectations for single-family rentals ought to be more like 7.5 percent to 8 percent to compensate for greater risk, he said. Source 3/1/2013 (Bloomberg)
• Tricon Capital Group Inc (TCN.T - Toronto-based asset manager) launched a single-family rental investment platform in early 2012 and has since spent $160 million acquiring nearly 2,000 homes in California, Arizona, Florida and North Carolina. A Tricon spokesman said the company's net yields are in the 8% to 9% range and it hopes to own between 3,000 and 4,000 homes by the end of 2013. Source 2/20/2013 (WSJ)
• The American Homes 4 Rent venture should yield unleveraged returns of 6 percent to 7 percent from rents, before home prices and rents rise, according to Michael Burns. By comparison, high-yield, high-risk company debt, or junk bonds, are yielding about 6.6 percent. Source 2/13/2013 (Bloomberg)
• Analysts at KBW estimate cash returns on investments in REOs are in the 5-7 percent range, while total returns could reach 15-20 percent. Source 1/9/2013 (CNBC)
• Economists at Goldman Sachs estimate the annual yield on an investment on rental property nationwide averages about 6.3%, but can exceed 8% in cities that were hit hard during the housing bust, including Las Vegas, Detroit and Tampa. By contrast, mortgage bonds have average yields of just over 3%, and investment-grade corporate bonds are yielding about 3.5%, according the Barclays Capital U.S. Investment-Grade Index. Source 3/20/2012 (WSJ)

The market opportunity

• In January, investment bank Keefe, Bruyette & Woods estimated that institutional investors had raised between $6 billion and $9 billion to buy U.S. houses and convert them into rentals. Source 2/20/2013 (WSJ)
• "By some accounts, $6-9 billion has been raised or committed, suggesting potential acquisitions of 40,000-90,000 properties," according to Jade Rahmani, an analyst at KBW, who pointed out that this amounts to around 15 percent of unsold bank-owned, so-called REO (real estate owned), homes. "We expect the REO-to-rental market to experience robust growth over the next 12-24 months, potentially emerging as an institutional asset class." Source 1/18/2013 (WSJ)
• Demand for single-family home rentals has always been there: it represents 33 percent of home rentals, according to Green Street. Until now, though, most rentals were handled by small-time landlord-entrepreneurs (5-10 homes) per Bob Curran at Fitch Ratings. Source 12/9/2012 (NYT)
• According to Census Bureau data analyzed by Green Street Advisors Inc., there are about 25.5 million single-family rental properties—defined by Green Street as houses with between one and four units—in the country, compared with just 18 million rental apartments in buildings with five or more units. Source 5/8/2012 (WSJ)
• Barclays Capital estimates 800,000 former owner-occupied homes are being converted to rentals each year (last year a total of 4.3 million previously owned homes changed hands) Source 3/20/2012 WSJ

Links and Sources regarding buying homes to rent as an investment asset class

• 3/1/2013 - Carlyle Avoids Mowing Lawns in Housing Rebound: Mortgages
• 2/28/2013 - 4Q2012 Earnings Presentation and 4Q2012 Conference Call. Silver Bay Realty (SBY) Prospectus (12/12/2012)
• 2/27/2013 - American Homes 4 Rent to Sell Shares in Public Offering (2/27/2013) The company will submit a registration statement with the U.S. Securities and Exchange Commission within 60 days. American Residential Properties Inc. said on Dec. 5 that it probably will file this quarter to go public.
• 2/20/2013 - Foreign Buyers Hop on Rental Trend (WSJ)
• 2/13/2013 Billionaire Hughes Chasing Blackstone as U.S. Rental King (Bloomberg)
• 2/7/2013 Altisource Residential Corp (RESI) 10K - We currently intend to acquire single-family properties primarily through the acquisition of sub-performing and non-performing loan portfolios ... Our competition includes other REITs, pension funds, insurance companies, hedge funds, investment companies, partnerships and developers ... We also face significant competition in the single-family rental market from other real-estate companies, including REITs, investment companies, partnerships and developers.
• 2/4/2013 The Ugly Truth About America's Housing "Recovery" -- It's Wall St. Buying Homes to Rent Back to Their Former Owners - The housing “recovery,” as they’re calling it, is fueled almost entirely by Wall Street private equity firms, hedge funds and the Fed's unwavering support.
• 2/4/2013 - Big money betting big on housing (Money)
• 1/18/2013 - Rental Bonds Hit Snag (WSJ)
• 1/9/2013 Meet America's New Landlords: REITs (CNBC)
• 12/9/2012 Big Money Bets on a Housing Rebound (NYT)
• 9/17/2012 Boost for Foreclosure Market
• 7/20/2012 Plotting a Securitization Sequel - firms such as Colony American Homes and Waypoint Homes have snapped up houses in foreclosure and rented them. Backed by investment banks and credit-rating firms, these firms think they have spotted a new opportunity: Packaging thousands of those rental payments into securities and selling them to other investors, a process known as securitization.
• 5/8/2012 - Builder Is Constructing REIT for Home Rentals (WSJ)
• 3/20/2012 - Wall Street Keys On Landlord Business (WSJ)

I originally wrote about this topic here on May 11, 2012 - "This is an idea I've thought about and wanted to investigate, but also assumed others must be working on. I think there would be plenty of demand for funds that own residential unmortgaged rental properties and pass the rents through to investors. Housing funds in theory could provide opportunities and uses for many investors and homeowners. The article notes the problems of amassing a large enough portfolio, as well as the maintenance and operating costs. I think those problems can be overcome and it would be really interesting if there were eventually funds of homes for specific cities, regions, and even countries."

Some are skeptical that buy to rent investors are a positive development. I suspect most of the firms identified above are long-term oriented and will have a positive impact, although this article notes "Och-Ziff Capital is already starting to sell the single-family homes it bought since the recession began."

• Santelli: What's Blocking Housing Recovery? 2/19/2013 - Ed Pinto suggests investors buying rental properties represents "Hot Money".
• The Ugly Truth About America's Housing "Recovery" -- It's Wall St. Buying Homes to Rent Back to Their Former Owners 2/4/2013 - The housing “recovery,” as they’re calling it, is fueled almost entirely by Wall Street private equity firms, hedge funds and the Fed's unwavering support.
• Matt Taibbi comments 3/19/2012

From an investment perspective, I think the home rental investments may be particularly interesting for individuals that don't own homes, especially those that are planning to buy a home in the future, in which case they can attempt to hedge against rising prices by buying rental homes (similar to one of the potential planned uses of the real estate futures conceived by Robert Shiller). The asset class also has the potential to smooth out real estate price moves in the future. If prices rise too much relative to rental rates, rental homes can be sold adding to the supply and potentially reducing prices. If prices drop relative to rents, more homes can be converted to rentals, reducing the supply and potentially increasing home prices.

There are already signs of a secondary market developing for buying and selling portfolios of rented homes (in addition to the standard markets for individual homes). We may also see mergers and acquisitions among the active firms as they attempt to grow and achieve economies of scale. I'm watching the development for both investment reasons as well as for its effect on the recovery from the Global Financial Crisis. Another potential benefit of these firms is from increased hiring and spending on construction of homes to get them in shape for renting (SBY estimates they spend 15% of the purchase price on homes they renovate before leasing).

Gary Karz, CFA
Host of InvestorHome
Founder, Proficient Investment Management, LLC

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