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Sifting Fact from Opinion on Institutional Investors

by Steve Cook on December 27, 2013 · 7 comments

  
Opinion on Institutional Investors

Just before Christmas, RealtyTrac issued a white paper on the buy-to-rent business that features a discussion of how the business got to where it is today, but delivers with a narrow, perhaps biased view of where it’s going tomorrow.

The report’s central points are not news to most readers of this blog: rising prices and shrinking inventories have changed the game, huge hedge funds have changed the rules in the markets where they have been most active and in the future investors will have to look beyond the well-worn markets and manage their properties well to succeed.  If you’re looking for a source of good data and graphs on these topics for your next presentation to investors or business plan, download the White Paper on Buy-to-Rent Market.

Here is a summary of the report’s more interesting points:

  • Institutional investors as a whole (even when defined as investors purchasing at least 10 single family homes within a calendar year) are still very small fries in the REO-to-Rental business.  They purchased a combined total of 366,206 single family homes from January 2011 through November 2013, but that’s only 7.7 percent of all residential property sales in November and 6.3 percent a year ago., according to a separate RealtyTrac report.  (By the way, don’t make the mistake of equating “institutional investor” with hedge funds.  This description also covers REITs, turn-key investors like Norada and Memphis Invest as well as larger partnerships and integrated investment companies.)
  • Poorer neighborhoods are being passed over in favor or richer ones; prime neighborhoods make better targets for hedge funds than normal “core” areas.  The average price per square foot of premium homes, defined as those with a purchase price of $300,000 or more is increasing at a faster pace than the average price per square foot of a home in a “core” neighborhood.  In light of the concern in many circles on the impact of investments in lower income neighborhoods, this deserved a news release.
  • Higher-priced homes can have lower expense ratios.  For example, in premium neighborhoods, such as Beverly Hills, the expense ratio (Costs /Annual Rent) is barely above 11 percent — lowest among the 74 cities.  I know there’s a hot business in upscale flipping these days ( see Are You Ready for the Super Flippers?) but how many REO-to-rentals can there be in 90210?
  • Because they need to acquire as many properties as possible quickly, large buyers have created a new job description, the “SFR institutional operator,” a sort of local mercenary who buys and rehabs properties on spec for the big dogs.

The white paper concludes with a discussion of the critical issue of property management, beginning with the obvious advice that in the future investors should carefully manage their portfolios in current markets, focus on the property management of their existing homes and “expend (sic) geographic footprint, acquiring homes in secondary markets.”

In addition to two serious typos on pages four and five that change the meaning of sentences, it doesn’t take long for the reader to notice a departure from RealtyTrac’s usual high standards.  Lack of balance, assertions heavy with opinion and slim supporting data suggest another agenda is at work.

Statements like these cause one to wonder:

  • While small investors could acquire properties efficiently, management was often less efficient. (Whoa there…evidence please. If that’s the case, why is Blackstone financing small, individual investors?)
  • Public offerings of Silver Bay, American Residential Properties, and American Homes 4 Rent along with the first-ever securitization of rental homes by Invitation Homes – at a very low rate – have demonstrated that public market investors buy into the potential of SFR rentals. (That’s news to me. I think most folks on Wall Street would argue the jury is still out. The Blackstone deal was not structured on a Remic structure, not on rental leases, and it’s still being marketed.  See Blackstone Beats Back the Bears.  Regarding REITS, there’s not much to cheer about.  See Tracking the Hedge Fund Big Dogs: Prices and Plots.);
  • A tidal wave of institutional investors have (sic) accumulated hundreds of thousands of homes over the past years, creating operational challenges and complexities never seen before. ( Seven percent market share hardly makes a tidal wave.)

Equally concerning are the many critical issues the paper chooses to ignore: the departure of a number of institutional investors from the market, the acquisition of property management firms by Blackstone and others to facilitate securitization, the prospect that demand and rents will decline, the housing recovery).

Pintar, an investment and  property management company, co-sponsored the report and provided a wealth of valuable data from its experience with management expenses, rents and gross ratios.  The company seems to have a fascinating story to tell and legitimate points of view.  However, when red flags go up over obvious bias in documents like this one it’s hard to sift the wheat from the chaff.

Photo Credit: _Dinkel_

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{ 7 comments… read them below or add one }

Gerald Harris December 27, 2013 at 8:23 am

Ultimately there never will be any competition when it comes to your wants and needs as an individual investor. What are your goals? What is your plan? After being associated in the real estate business since 1996 the investors who began back then before me have learned how to adapt and change with changing markets. During the Subprime Fallout it was my fellow Real Estate Agents, Loan Officers and Fix and Flip Investors in California who hurt the most. But my investor associates who were long term on their buy and holds did great. Many of them hardly missed a beat. As an individual investor as long as you work your niche and maintain honest and ethical practices you will always win in my eyes. Great Article!

Reply

Steve Cook December 27, 2013 at 11:03 am

Thanks Gerald!

You make a great point.

Stefe

Reply

Ben Leybovich December 27, 2013 at 1:38 pm

Steve – and people read this bull and believe it. Great job Sir!

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Alan Mackenthun December 29, 2013 at 11:53 am

It seems to me that 7% is a pretty large # relative to where it was especially when you consider that institutional investors seem to be concentrated in certain markets and sub-markets. Stil, I always enjoy your reports, though I sometimes have to set them aside as I end up having to do extended reading on all the supporting materials. Thanks much.

Reply

Steve Cook December 29, 2013 at 3:25 pm

Alan, thanks for your comment.

7 percent is indeed a lot of houses. At 4.5 million sales a year, that’s more thanr 300,000 houses. Remember, though, that that statistic includes everyone who buys more than 10 properties a year, including flppers and “turn key” investment copmanies that bear very little resemblence to folks like Blackstone and Colony.

Steve

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Daren Blomquist December 30, 2013 at 12:49 pm

Steve,

As always appreciate your writing here, even if it offers up some critiques of this report. Certainly I apologize for the typographical errors. There is no excuse for those and we will work on getting those fixed. As for the critique that this white paper does offer up opinion as opposed to straight facts, that was understood by us and the reason we chose to issue this as a white paper rather than a straight report.

Also, the white paper was intentionally written to be a high-level summary of the situation, but we did analyze the underlying data extensively, both on the acquisition and disposition side with nationwide sales deed data from RealtyTrac, and on the operational side with proprietary data from Pintar.

Lastly, I would say that while there are statements in the paper that show an optimistic outlook on the buy-to-rent industry, the main thrust is to provide a dose of numbers-based reality for the industry — particularly when it comes to the costs of managing these properties. The point is that what may look good on paper prior to acquisition may not always look as good in reality post acquisition, and industry players would do well to learn this lesson as soon as possible.

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Steve Cook December 30, 2013 at 2:14 pm

Daren;

Thanks for your comment.

I hold you and your firm in very high regard. When the first waves of foreclosures washed over America’s housing markets, RealtyTrac was the first with the hard data and analysis real estate consumers and professionals desperately needed at that time. For years thereafter RealtyTrac has served a unique and vital role by assessing and alerting the public to the foreclosure threat, which also became an opportunity for the hundreds of thousands of investors who launched the REO-to-Rental business.

I think it’s a good thing when companies like RealtyTrac and Pintar share their data with the public. It’s also a good thing that companies like Pintar sponsor white papers and studies that fill in the knowledge gaps. I had the opportunity to do something similar with BiggerPockets and Memphis Invest over the past two years.

As you note, how information is labeled and presented is important. I noted in my article that it was a white paper, but I’m not sure if I or anyone else who read it understood how a white paper differs from other RealtyTrac content. I received it directly from a RealtyTrac public relations person and it is available to the public with other news releases.
In sum, I was most disappointed in the quality of the piece because the issue of property management is so critical and so little of the paper delivered anything new. Pintar probably has some critical data that could provide answers to help us better understand successful management strategies and conditions. The data on expense ratios was a good start, but only the surface was touched (tax rates, condition of house, higher-priced homes).

Steve

Reply

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