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_Sifting Fact from Opinion on Institutional Investors by Steve Cook