Business Week called him the Data King of Rental Housing and the reporter who wrote the story said Wally Charnoff is “the guy who tells Wall St what they didn’t know about becoming big landlords.” His RentRange was the first real estate data provider to concentrate on single family rentals and it’s such a unique source of SFR information that it licenses its reports to CoreLogic. Charnoff’s knowledge of the marketplace and the players who shape it affords him an exceptional perspective on the issues facing single family rentals today. Last week he shared with us his views on range of topics.
There’s a belief among investors that as home prices rise in a market, single family rents will also rise. Now that home prices are appreciating at a double digit rate, are rents rising at that rate?
I don’t think rises in rental rates are necessarily tied to rises in home prices. You can’t really make a direct correlation between them. Today we are seeing a lot of other market drivers that are influencing the rental market more than home prices. You have a lot of former homeowners who still can’t quality for financing. They want to stay in homes but they see renting as more opportune right now and they’re looking for rentals in those neighborhoods where they used to own, so they are renting a home. There are prospective buyers who can’t get financing, which is still not easy. Others don’t want to buy because they don’t think the market has hit bottom yet. Finally, a lot of single family renters simply don’t what to become owners.
Is there a glut of single family rentals in some markets that is causing a cost advantage for rentals?
I think it’s the other way around. I think single family rentals are being created because of the opportunities. Renters need good quality rentals in good neighborhoods where there are good schools for the kids. So it’s the demand for single family rentals that is driving the supply, not vice versa.
Do you see any difference between properties owned by institutional investors and small investors in terms of vacancy rates?
In our vacancy rates, we look at rent-ready homes, so typically the difference is how long it takes to get a home ready to be rented. We don’t track vacancy rates separately so we don’t look at the mom and pop investors who might be dong a few properties a year versus institutional investors. We’re not skewing our vacancy rated based on how efficient someone us rehabbing and advertising a property. Yet that’s where you see the big difference between investors. How long does it take the owner of a property to turn that property, to get it back out there for someone to rent?
Turn Time and Checkbooks
So you’re saying it takes institutional investors longer to get properties ready?
No, I think turn time really varies from institutional investor to institutional investor. Some institutional investors now are buying properties and warehousing them. They don’t necessarily have their rehab and marketing operations up and running. On the other hand, there are some investors, particularly turnkey real estate providers who get in there, and get it rent-ready and advertised for lease quickly. I think that we’re seeing a lot of variance, player-by-player, on the institutional side.
Is the same true of the small investor? Do some take a long time to get a property ready?
Small investors have to get everything ready as soon as possible. Bear in mind that they don’t have the check books that the institutional investors do, so they have to get that cash flow going, especially if they are carrying a mortgage on it. Otherwise the property’s not generating an income.
Bidding on the Same Assets
Some people are saying that the large numbers of properties that institutional investors are buying in a few markets is going to create a glut that will negatively impact rents and vacancy rates. Have you seen any evidence of that?
We haven’t seen that at all. The largest impact that I have seen as the result of a lot of institutional investors being in one place is that they are bidding on the same assets, so their purchase price goes up and their return on investment goes down. But that’s good thing for the housing market because a lot of the rise in the housing market that we are seeing is really driven by the institutional investors bidding for the same assets. It has a positive impact on the recovery because it brings up home prices, to an extent. When we were at the peak of homeownership, more than ten percent of the single family housing stock were rentals.
There has always been always a market that needs single family, detached rental properties. If you look at what’s going on now, the demand is even greater. There’s a fear that we haven’t hit the bottom yet. A lot of people are just a little bit scared to own a home or don’t want the hassle of owning a home. They don’t want to have the maintenance or the mortgage any more. And again, it’s not easy to qualify. So if you take that 10 percent rental rate and add all the other market drivers that are driving up that need for single family rentals, you have a lot of demand. If you look at the markets where the institutional investors are buying up properties, there is demand for single family rentals among families that want to stay in the same school systems and don’t want to leave. The institutional investor is providing the inventory to make that possible.
If anything, in markets where a number of institutional investors are concentrated, they are keeping rents from going up but not creating vacancies. There is a steady supply of renters who want to be in those neighborhoods. Now, when those neighborhoods normalize, when it gets easy to qualify, when people feel like it’s hit bottom and it’s time stick their toe in the water again, institutional investors will do better in those neighborhoods by selling their homes to homeowners and moving on to another neighborhood that’s more of a rental-type neighborhood. When that happens, the rental supply will become an ownership supply. So I really don’t see how institutional investors are going to be saturating markets with rentals or creating a long term problem.
Underestimating Property Management
Looking ahead, do you see consolidation among institutional investors that will end with two of three companies owning a vast majority of rentals, or will they leave the market altogether after selling their properties to homeowners. What do you see happening in the next two or three years?
There will be some consolidation, but it will be consolidation that is going to be driven more by the operational aspects of running the business. A lot of players are still underestimating the property management piece. It’s not just not a matter of buying a piece of property and getting a purchase price so that you can get a good return on investment. You also have to maintain and manage the property and manage turnover. That’s operationally challenging and I think that we will see some consolidation and some are more efficient at that than others.
I think that residential real estate as an asset class that investors are buying and holding is here to stay. Some of the market drivers that are creating renters today will become permanent. Add that to the 10 percent of the detached, single family housing stock that has always been rental. Consider that since 2000 there have been on average a million or more transactions a year bought and sold involving mom and pop investors, when institutional investors weren’t even a factor yet. That’s a lot of homes. That’s significantly more than the 50,000 to 60,000 houses purchased that have been purchased so far by institutional investors.
Single Family Realities: An Interview with Wally Charnoff, the "Data King of Rental Housing"
by Steve Cook
Photo:Jonathan D. Blundell