Why Some Hedge Funds Will Absolutely FAIL at Single-Family Rental Investing!

by | BiggerPockets.com

Before reading further, I want to make it clear that the term “Hedge Fund” is a very “broad term” and that I am not writing this to stir up a bunch of anti-Hedge Fund comments.  The fact is, the introduction of big buyers into the market has both helped and hurt and probably will continue to do both for a while.   I am writing this article because just like every other business out there, some companies will succeed and some will fail.  Single-family rental investments are not different and some Hedge Funds will do well and some will fail!  And they will fail for some of the same reasons other companies fail and for one BIG reason.  Failure to understand the Hedgehog Concept.

Simply put, the Hedgehog concept comes from the book “Good To Great” by Jim Collins and is all about knowing what you do better than anyone, how that drives your company and then getting passionate about it.  Hedge Funds were created for one purpose…to be a hedge.  They were originally created to be great at protecting the participants capital.  A safety net against riskier investments.  Unfortunately, many in real estate investing  are wondering just what in the world some hedge funds entering the single-family rental market are thinking and doing because the strategy seems less like knowing what you do best and more about flushing dollars down the toilet…and neighborhoods with them.  Not exactly following the Hedgehog concept or the original intention of a Hedge Fund.

Hedge Fund or Institutional Buyer…Is There A Difference?

Definition of Hedge Fund:  An aggressively managed portfolio of investments that uses advanced investment strategies such as leveraged, long, short and derivative positions in both domestic and international markets with the goal of generating high returns (either in an absolute sense or over a specified market benchmark).  Legally, hedge funds are most often set up as private investment partnerships that are open to a limited number of investors and require a very large initial minimum investment. Investments in hedge funds are illiquid as they often require investors keep their money in the fund for at least one year.

Definition of Institutional Buyer:  A corporate entity that falls within the “accredited investor” category, defined in SEC Rule 501 of Regulation D. A Qualified Institutional Buyer (QIB) is one that owns and invests, on a discretionary basis, at least $100 million in securities; for a broker-dealer the threshold is $10 million. QIBs encompass a wide range of entities, including banks, savings and loans associations, insurance companies, investment companies, employee benefit plans or entities owned entirely by accredited investors. Banks and S&L associations must also have a net worth of at least $25 million to satisfy the QIB criteria. 

I found both definitions on Investopedia.com and thought they were perfect for this article because the definitions do a really good job of illustrating the difference between the two.  In many cities around the country, there are institutional buyers doing much of the investing and they are buying millions of dollars of real estate.  They have been for years.  I met with a family operation that is considered an institutional buyer back in 2009 and they had an excellent plan and purpose for investing in single-family homes.  They were very clear on the properties they wanted to purchase, where they wanted to purchase them and why.  The plan they shared with me made perfect sense and what was so brilliant about it is that no one really knew they even existed.  They were purchasing properties in designated areas with a small group of people making decisions and with very good companies providing the expert services they needed.  Yes, they were purchasing properties in two parts of the country, hundreds of miles from where they lived and were having success.  They spend their time cautiously buying the properties they want in the areas they want them and then building and funding the teams they need in each area.

Juxtapose that with what many investors today recognize as Hedge Fund buyers.  They are not nimble nor are they quiet.  Some of the ramifications of their entry have been escalating prices with some winning bids at nearly twice the list price and double the next highest bid.  A quite common explanation is that they have an algorithm that tells them exactly what to buy, where to buy it and how much return on investment they will get.  Of course, any experienced  real estate investor knows that money can be lost quickly in real estate and trying to spend your way out of a bad property can get expensive quick.  When properties are bought with no regard to price and even less regard with how to make them operate as an asset, trouble is quick to follow.  Some Hedge Funds do not appear to have the patience of an institutional investor.  They are set up to act quickly – not even “ready, fire, aim”.  They are set up for “fire, fire, fire…now let’s see where we were shooting”!

Real Life Example Of Crazy Real Estate Thinking…

Before this becomes some gab fest where we all jump on Hedge Funds, let’s be real clear about a few points.  There are good and bad in every business.  I think the same goes here.  What I have found is that there are a handful of Hedge Funds that know what they are doing and are going to be fine.  There is a real sense that in the end, they will buy up much of what the institutional investors have been acquiring over the last few years.  That could happen and you will see the big boys and the small operations both win.  What is left…and who I think could fail…is the muddy middle.

The muddy middles are those funds that have found themselves buying anything and everything and hiring anyone off the street who will take their low-ball offer for services.  I have seen both good hires and bad hires by the Funds, but I have yet to see a deal where the funds bought expert companies for true market value and brought them in to do what they do best.  Instead, I have seen talent gobbled up by Funds only to have their hands tied on a local level with lack of funding for the basics like staff!  While Hedge Funds have completely changed some markets around the country, in some areas they have left gaping holes in the normal services like proper repair, great management for tenant satisfaction and a poor understanding of what awaits them in 12-36 months.  Experienced investors know that returns do not get better over time.  In fact, they will decline at some point as maintenance comes due.  When you do shoddy work on the front end because of lack of funding, the bill comes due on the back-end and returns drop even harder than anticipated because of high and quick turnover and a constant stream of maintenance.  Some funds get these types of challenges and some don’t.  Allow me to illustrate:


This property was recently purchased by an investor with my company.  No big deal – take a quick look for comparison.  Nothing more than a nice ranch home that fits the typical model of a 3/2 ranch in the suburbs ringing Memphis.  Who owns it and what portfolio it goes into does not matter.  What matters is that the house itself and the way it is presented to a renter are designed to attract high quality.  The work done on the property is also at a level to minimize maintenance.  Prior to us purchasing the property, we had tried to buy another property a couple of doors down.  There were two bids on it so it went to highest and best.  We raised ours only a small amount.  The winning bid went over the list price by 50%…they really wanted the house!

But why?  Because it was a Hedge Fund buyer with a local operator who has been tasked with buying as much property as possible.  What makes this even more peculiar is that we bought the house a few doors down for listing price!  A Hedge Fund – with a smart, local strategy – could have purchased both properties for only slightly more than the price paid for one.  So what about a rental strategy?  One of the big reasons that there has not been much of an impact on my market from the Hedge Funds so far is that the quality of work being done on the rental properties is so poor.  It appears from all indications that there is no limit on purchase price, but there is a huge limit on dollars allocated for renovations and curb appeal.  As you can see from the pictures, it really looks like a “rent ready” mentality.  Spend as few dollars today with as little work possible, to get someone in the property!  The property is listed lower than our rent range and still sits vacant to this day.  Why?  The pictures show a property with overgrown grass, 4-foot tall weeds, a missing A/C unit, no kitchen sink, dirty carpet and a rusty water heater in an outdoor closet with no handle or lock on the door.  Yup…that just about sums it up!  It does not look like anyone has even been by the property in weeks and this is acceptable how?





Local Reps For Hedge Funds:  Lazy or Just Underpaid

At first glance I know a lot of readers may put equal blame on local providers as they do on the Hedge Funds.  I agree that in some respects that is true.  In this case, I removed the rental signs on the property because the local company does not matter.  Readers from every corner of the country will have a similar story to this one from their city.  The question becomes, as a local provider, should you not have some responsibility to your own business and the neighborhoods where you are operating?

Unfortunately, when the ink from a deal is dried, it becomes apparent that there is not enough money to go around.  This is where the real criticism of some Hedge Funds (or Hedge Funds in general) really comes in.  More and more investors see this happening in their communities.  During a recent conversation I had with a HUGE fund, they explained the term “warehousing” to me.  It is the practice of some mid-size funds going around and buying up everything they can without regard to the performance of the property.  They simply want to buy, hold, maybe renovate and rent when they can get to it, but hope that a bigger fund will come in and buy their portfolio.  Hence – the name.  They are literally warehousing empty houses like any other shelf stable commodity.

As a business owner who has built multiple businesses at this point, I know a thing or two about properly staffing a company and the trajectory of growth that tells you when to hire and train new staff.  That includes every position including buying, renovating, renting, managing and then leading each of those departments.  When Hedge Funds come into markets and hire companies like these, they are not walking in with a suitcase of money saying “here you go – go build your team”.  They are walking in expecting big numbers on all fronts and they want it done on a budget and on-time.

Many funds offer what amounts to a few percentage points of purchase price for the local company they hire to run the business.  A few percentage points on a low dollar average purchase price does not create enough overhead for proper staffing.  In some cases we are talking about $1,500 to $3,000 per property.  That sounds awesome when the fund wants to buy 500 properties in a year!  That is a cool $1 million+ dollars…  But that is a gross revenue number and any decent company worth their salt can make 5 times that on a property and deliver something they can be proud of and happy to tell others in the city that a property represents their work.  With pictures like the ones above, what is the point?  Most any good business person would be ashamed to put their name on work like that.  When there is not enough revenue to cover the overhead of proper staffing, oversight and operation of a company that has to buy and renovate 10 properties a week, something has to give and it is going to be the quality of the properties.

You can probably tell at this point that I do not blame the local company for the pictures above.  Should they do a better job?  Absolutely.  Unfortunately, they run an ad every Sunday in the real estate section and the ad with what is presumed to be every vacant address grows every weekend.  This past week the list of vacancies was over 300 properties!  I can only speak for the two cities that I operate in and I can tell you that I have been impressed with some Hedge Funds that I have had the pleasure of meeting with one on one.  Most seem to have their act together, but this is a pretty good example of the down side to the heavy buying volume of institutions and funds.

I have seen what a poorly executed plan can look like and the damage that can be wrought on neighborhoods and I have not left one meeting without bringing up the damage that some Hedge Funds are doing.  I can guarantee you that no Hedge Fund has an algorithm with 15%+ vacancy rates and houses that look as bad and sit vacant as long as the one above.  You simply cannot calculate how quickly the safety underlying a Hedge Fund is wiped away!  For me, this is exactly why some Hedge Funds will absolutely fail at Single-Family rental investing.  I just hope the local companies that signed up for the ride can find a way to weather the storm.

About Author

Chris Clothier

In 2005, Chris Clothier (G+) began working with passive real estate investors and has since helped more than 1,100 investors purchase over 3,400 investment properties in Memphis, Dallas and Houston through the Memphis Invest family of companies.


  1. What a coincidence, at the local REI meeting I had the pleasure of attending last night, the keynote speaker was talking about this exact subject. Institutional buyers are certainly having an impact in Las Vegas, Nv.

    • Chris Clothier

      Maurice –

      Thanks for the comments. They are certainly having an impact, and like I noted in the article not all of the impact is bad. You only hav to look at rising price points and decreasing inventory to know they are having an impact that can be positive. But, there is a down side to all of the buying and many people are starting to take notice.

      All the best to you –


  2. John Thedford on

    I find it amazing to spend that kind of money and then let your investment fall into disrepair. In Florida, we have a huge presence of hedge funds. I am curious to see how well they take care of their properties. Very good article. Thanks!

    • Chris Clothier

      Hey John –

      Thanks for the comments. In truth, none of us should find your statement that surprising. Investors have been doing this ever since owning a piece of real estate and renting it back to tenants. The temptation to squeeze dollars out of a property by skimping is a practice as old as real estate itself. So I am not surprised that it has become a practice of some funds in many cities around the country.

      Thanks for reading –


  3. I don’t know where you found that hedge fund Chris. I work with what I believe is the biggest fund in Memphis and they over rehab like crazy. In fact most other landlords are struggling to compete with them quality wise. Your company would be the exception as your rehabs are so good.
    I literally can’t believe how much the funds spend on rehab, replacing roofs with years left in them, fixing absolutely everything and remodelling. I would estimate they spend nearly double what most other companies in Memphis would.

    • Chris Clothier

      Dean –

      Thanks for commenting although for some reason it seems that whatever the article, your comments keep being 180 degrees in the other direction of the point I am making. Which is good – don’t get me wrong – I enjoy debate and appreciate the comments. Thanks also for the compliment on our rehabs.

      There are a lot of funds in Memphis right now and there have been for the past couple of years. Unfortunately, no matter how big they are, they all are subject to the same problems – the talent and mindset of the people they hire and the mindset they bring to the table. I have met with more than a handful of them and all except one felt like our budgets and the list of items that we repair on properties were too extensive and unnecessary. Of course, they are only looking at a narrow window, maybe 7-10 years, so the question they ask is why replace anything, I just need it to perform for a short period.

      I can tell them why because that used to be my same attitude. Right up until I reviewed the performance on my properties and realized that in 3-4 years I had paid out the equivalent of a new roof in small repair bills. Same thing with A/C and furnace units. The cost of 3-4 repairs equals the cost of a new unit so why skimp on the reapirs in the beginning? Replace it and get the warranty and enjoy a (possible) more predictable outcome for your investment.

      Either way, I don’t doubt your assertion that there are funds that spend double what some landlords would spend on repairs. They are the ones that will thrive and survive while unfortunately others will not. And by the way, the example house is in a great part of Memphis and the weeds are just a bit taller today than they were when I wrote this last week. The house is still in the same condition it was over 4 weeks ago when I first came across the property while showing another fund examples of our work. We’ll see what happens.

      Thanks again for reading and writing your comments.


    • Chris Clothier

      Hey Jeff –

      Thanks for the comments. I have met some of them – and they were the smartest guys in the room. But of course, they were sitting around with a bunch of southern dummies that never graduated college!!

      I should add for my little brothers benefit that he did graduate with a degree in real estate, but by the time he graduated he knew more than his instructors. We’ve proven to be just dumb enough to build 9 businesses to over $10 million is annual sales between us with 3 of them producing over $50 million in annual sales. So maybe we’re not so dumb after-all.

      Have a good one – Chris

  4. The big picture is the hedge fund guys are investing other peoples money, when they fail it is not like if a normal REI person fails.

    I have several private lenders, who I would not want to fail.
    If however my private lenders put their money with a hedge fund and it failed who would care for them at the hedge fund?

    I hate to bring this up, but what these guys did for Wall Street is coming to a neighborhood near you. These guys are short term investors, they will not be keeping properties for 30 years, that is unless they create a monopoly, which is pretty much what they have done on Wall Street. Get ready for your local code enforcement laws to tighten up.

    The object of the game for large corporate concerns is to crush competition, a noble quest but painful for the competition.

    • Chris Clothier

      Dennis –

      Thanks for taking the time to read and write your comments. I think only time will tell which funds are able to hang around for the long-term and which one cannot. Interesting that you bring up Wall Street and the competitive nature of those who are entering this market from that background. You have to have a tremendous amount of respect for their approach and what you call their desire to crush the competition. From having met some of them, you are exactly correct. They are not overly concerned – nor should they be – about other investors. They are entering this market because the opportunity to make a small fortune.

      We will see who that opportunity pans out for.


  5. One thing I am confused about in your example Chris.
    You bought 7124 Amberly for 65K. The fund paid 50K for 7112.
    So surely the fund has bought way better and can therefore spend more. They are 15 grand ahead of you on the purchase. So how is this an example of a hedge fund paying too much?

    And as your pictures of the funds property are pre rehab your comments
    “As you can see from the pictures, it really looks like a “rent ready” mentality. Spend as few dollars today with as little work possible, to get someone in the property!”
    are also completely incorrect. As I said earlier this fund will spend 15 to 20K on that house. And then they will be completely rehabbed and only be at your buy price!
    Like you I am all for debate but the facts need to be correct I am sure you would agree.

    • Chris Clothier

      Dean –

      I don’t recall having put an address in my article and I know I wrote that I removed the rental signs from the pictures to keep the fixation on particular property and companies out of the discussion. The problem with trying to talk about one particular house or one particular rehab is that it ignores the fact that there are literally hundreds of these scenarios out there and more and more professionals are starting to recognize the problem. It also allows someone like yourself to say I am attacking a particular company or group of fund – which, as I stated in the article I am not. I have multiple versions of this article – all similar but dealing with different issues, so I will double check numbers. Ultimately, I want the details to be correct, but not to take away from the point of the article – which is that the property sits vacant for months half rehabbed with rental signs in the yard being overgrown by weeds and no one is doing anything about it.

      I know you claim to have a roaring business going selling to hedge funds and I truly hope that you do. It would stand to reason that you would claim that your clients, whomever they are, do things better than anyone else – you are trying to protect what you think is yours.

      But when one of the original single-family rental funds calls it quits for the exact reasons I outline…it might be time to quit trying to defend the indefensible. Bruce Rose, CEO of Carrington Holdings, LLC “There’s a lot of — bluntly — stupid money that jumped into the trade without any infrastructure, without any real capabilities and a kind of build-it-as-you-go mentality that we think is somewhat irresponsible. We just don’t see the returns there that are adequate to incentivize us to continue to invest.”

      Everyone reading this article should absolutely read the entire text of the Bloomberg article and then come back and try to argue that letting houses sit for months – regardless of what price was paid – is good for anyone in the business.

      One more little quote from the article:

      “Companies that release financial results for single-family rental investments have reported losses as they acquired homes faster than they can renovate and find tenants.”


  6. Just looking at the properties, Chris’ house is 20% larger and all brick, relative to the smaller siding home, so clearly he has a much nicer property with correspondingly higher ARV. Also, the siding home is clearly being marketed by the fund’s PM in its abysmal condition, even though the fund closed on the house more than two months ago. No work has been done, and the grounds are not even being maintained. So I think his point regarding mismanagement is quite valid.

  7. Melodee Lucido on

    Thank you Chris for this article. I learned more than I knew from experience.

    I lived in Santa Barbara/Montecito until 30 days ago so made the effort to work/play in that market. I had returned to crei after a long hiatus.

    What I learned was that the hedges were buying anything and everything WAY above fmv (I mean really crazy way more) and just making things unfair for anyone, investors or home buyers.

    I started to learn the game as I talked with some of the realtors that worked with them. That’s when I said, “Ok, time to move out of state”. I know it’s in many markets but some maybe more pronounced than others.

    Anyways, your article helped fill in some of the blanks for this newer investor. Thanks!

    • Chris Clothier

      Hey melodee-

      Thanks for leaving your comments on the article. In the end, that is pretty much the only reason I write many of the articles that end up getting published. Just want to help fill in the blanks, raise some questions and get people thinking and talking. By no means is this a definitive article, but it does try to answer some questions and I am glad to hear that it helped you to figure out what is behind some of the latest moves in real estate over the past year.

      All the best to you and thanks again for reading.


  8. Jake Kucheck on


    I think you and I may have discussed this before, but I’ll bring it up again here.

    It doesn’t matter what they buy it for, spend on rehab, or rent it out for. It DOES matter what their IPO buyer is willing to pay for it.

    The nice thing about IPO buyers is that you get to set the terms of what they are willing to pay. So if XYZ hedge fund wants to spin their assets off into ABC IPO, they can say “here, we’ll sell you all this inventory at a 5 cap on a 30% expense ratio.”

    Let’s ignore the fact that a 5 cap is stupidly low and a 30% expense ratio is insanely optimistic, and focus on the fact that there is still a market for this product. If that’s the case, then we know the IPO buyer isn’t getting inventory at market value, or anything close to it. So, I think you are incorrect to say that the hedge funds will fail. At the end of the day, it is whomever ends up holding the bag that will fail. If wall street can figure out a market for the debt product to accelerate this SFR inventory aggregation process and then securitize it, the hedge funds will make even more money doing so.

    The hedge funds are definitely still the smart money. You just aren’t looking at the situation correctly.

    • Chris Clothier

      Jake –

      Excellent points! However, I think we are both right and in the end who is more right is going to come down to semantics. So far, you are the only one who has hit the weakest part of the article and that is – who really cares? If it were not an article on a great real estate blog, then is would not matter. Too often, real estate investors make arguments against hedge funds and institutional buyers that are built on the notion that somehow what they are doing is unfair, illegal or unethical and usually all of the above.

      I don’t make any of those arguments and actually take pains to avoid getting into the mud by painting all Funds in broad strokes. That is where I will take your comments and disagree with you. Your comments assume that ALL funds will go the IPO route or even have that option. They will not. I wrote the title of the article with one very specific word when it comes to the failure of some funds…SOME.

      Failure is another funny word because what may look like failure to us as real estate investors may be success to the fund managers and even the investors. You make a great point that as long as their is a buyer for their IPO then they will make money and some will make obscene money. But not all of them and some, there is that word again, will get crushed on the way to the end.

      I assume that everything flows up to a handful of funds that will go the IPO route. Meaning that eventually all of the homes being bought by the myriad of funds out there will either be held in small private funds or they will be cobbled together and eventually held by a handful of large Hedge Funds. The question will be who failed? In my opinion, the only way to know that would be to figure out if the middle sized funds made the returns they originally expected. That is how they keep score and we may never know. Bruce Rose of Carrington Holdings even says this himself in the Bloomberg article when he says they will wait on the sidelines for many of the institutional money players in the game today to be in a weak position from poor decision making and then come back in buying up their mistakes at discount:

      “Carrington may start buying rental homes again when other large investors decide to sell after learning they can’t make returns that justify the prices they paid, Rose said.
      “We’ll sit back in the weeds for a while and wait for a couple of blowups,” he said. “There’ll be a point in time when we’ll be happy to get back into the market at levels that make more sense.”

      Many will say that those funds which he refers to as the “blowups” failed. And they will have failed for the exact reasons I write about in my article. So, as I said in my article, the small institutional investors and the largest Hedge Funds, in my opinion, will most likely be just fine in all of this and those filing IPO’s should do very well. It is the ones in the middle that will make up that word I used in the title. They will be the “some” that when looking back at the objectives and the outcome will be deemed as failures.

      One last thing. IPO’s and the timing of such are greatly effected by the profitability of the company. When companies are having to report losses it will greatly effect their value. Of course, Facebook proved that those owning the stock at IPO time can still get very wealthy regardless of what the quarterly reports say. So I think you are correct. There will be a market for there IPO and there will be buyers. But I believe there will be failures too that get their inventories of homes picked apart along the way as well.

      Great comments from you and I really appreciate you taking the time to leave them. You are right, I think we have discussed this several times before.


    • Chris Clothier

      Ken –

      Thank you very much. I would love to connect sometime and hear how you have fared in Atlanta with so much competition. I know your company enjoys an excellent reputation so I would love to hear how things are going.

      All the best to you and thanks for reading the article.


  9. Frankly, I can’t get behind hedge funds because I feel they carry some of the same foundational concepts as mutual funds.

    A) You are depending on someone else to actively earn you a return. This breeds things like confirmation bias and survivorship bias.
    B) You are assuming the manager is smart enough to make money. It doesn’t actually matter if the manager is the smartest person in the room. What matters is do they actually exceed other funds and more importantly, beat respective indices over long time periods? Sometimes riding the average rate of growth with 4-to-1 leverage and cash reserves (i.e. conventional financing with RE) has better wealth building than being at the top of the curve with no or minimal leverage.
    C) Hedge funds kind of try “different stuff”, you know, like “hedging your bet”. To me, this implies some degree of market timing. Sort of like looking for good deals when the market is down, and selling when it’s up. I know that’s not the whole story, but essentially, investing in market timing has been shown to fail when used as a long term strategy. Buying quality stocks and holding them long term seems to be the only long term stock-oriented strategy that has worked consistently.

    So, those are my gripes with hedge funds. But considering I don’t invest in funds, and probably couldn’t afford to get into a real hedge fund anyway, I guess it’s a non-issue. My wealth building strategy is in place anyway, so it doesn’t make much of a difference.

    • Chris Clothier

      Hey Greg –

      Thanks for the comments on the article! To be fair, I’m not sure yet fi there are any funds that we could invest in yet even if we did want to! I don;t think any of them have had an IPO yet and one REIT that I know of is exiting the single family rental business.

      When I sat down and wrote this article two weeks ago, it was never about ONE Hedge Fund. It is about a philosophy that basically thinks single family investment property can be controlled in a consistent manner without substantial outlay of capital. It simply is not true. You cannot half way renovate a home or half ass the lease up process and expect a property – much less a group of properties – to have a consistent performance.

      To make it worse, you cannot skimp on paying for talent. Local companies have to be compensated properly in order to hire enough people and maintain a good watch over every step of the process. If the compensation is not good enough, then the talent will never rise to the occasion. They can’t. Something has to give and so far it looks like it is oversight and renovation completion.

      I think I’ve read bits and pieces of your investment strategy and you may be the best prepared out of all of us!

      Again, thanks for taking the time and leaving your comments –


  10. “They simply want to buy, hold, maybe renovate and rent when they can get to it, but hope that a bigger fund will come in and buy their portfolio”

    Sounds like the subprime mortgage philosophy of ‘sell crap to someone else before they realize what it is.’ So they may make a profit, but are they providing a quality service? And what happens if they get stuck holding the bag? Sounds more like speculation than investing based upon fundamentals.

  11. I fear this type of investing will have a negative affect on the whole industry. Low quality homes, poor customer service, and treating tenants as numbers will result in push back that will increase regulation on the industry. I also fear that the big money will push regulations that make it more expensive for the little guy and essentially push them out. Happens in many industries we should not expect any different in real estate.


    • Chris Clothier

      Jason –

      Thanks for taking the time to read and comment on the article. I don’t share your fears on regulation or on a concerted effort to push out small investors. Hedge funds have had a localized impact on real estate markets and they simply don’t have the desire or wherewithal to buy at such a level that it impacts national policy. I think they absolutely have an impact on local investors abilities and you may see localities taking actions to add hurdles to investing such as rental registries for vacant homes and a greater enforcement of building codes and blight enforcement. Those issues will have an effect on all investors, but I just don’t see anything coming down nationally….but I could be wrong.

      I really appreciate your jumping in on the conversation.


  12. No need to fear Jason, this is not happening in Memphis anyway. The major fund here is buying much better than Chris’ company, (based on his Amberly example) and delivering much higher yields. The fund is all in at 65K on their home. Chris’s was advertised for I think 105K.
    As both rent for the same amount I know which one I think is the winner.

    In fact the reverse is true in Memphis.
    Hedge fund activity since last August has
    1. Created 200 jobs
    2. Poured 18 million into the local construction industry
    3. Stabilized 1000 homes that were either vacant or trashed
    4. Increased rental yields by demanding premium rents
    5. Produced 1000 high quality rehabbed homes in a city that often does a bad job.
    6. Created 1000 more homes now paying their taxes.

    And they have done all this while buying better than most of the locals. Chris blog appears largely based on the Bloomberg article, it certainly isn’t true at all here.

    I think in Memphis anyway we should be applauding the benefit to the local economy, employment, local government and quality of life for renters.

    There is only 1 negative to a good hedge fund entering real estate and that is they tend to drive up rents which is not so great for renters. In smaller cities they can also artificially inflate buy prices but as evidenced in Chris Amberly example that is not the case here.

  13. My first response when I heard hedge funds getting into this business was,’ Yeah Right!” As in, yeah right you’re going to find a property management that can COMPETENTLY manage the property, the you will get QUALITY tenants with little turnover, and full vacancy. As a real estate investor, I just thought at that volume it would be impossible to get the ground game up and ready to do what needs to be done on that scale. I mean, I have yet to meet a contracting company thats NOT at least 4 weeks out for renovations. They’re all busy WITHOUT the hedge funds, let alone with them. The ground game isn’t there, and from your article, it looks like that is panning out. I know when the best contractors take 4 weeks to get to your property, and all the property management companies are only “alright” in any given area, how are you supposed to replicate that for 1000 houses, when its hard enough for 1????

    • Chris Clothier

      Lisa –

      That is what many of us in the industry thought. The problem though is not that there are not companies to provide the services. The problem is that there is not enough money being put toward staffing, renovations, oversight and management. Every dollar spent in those areas lowers the rate of return and while some homes are bought well, others are bought poorly and the aggregate is a squeezed return. There simply is no money to make things run more efficiently.

      When speaking with one of the largest private funds buying here in Memphis, they don;t waste time making up fake numbers. They are business people – their jobs are to face the truth and go to wrok fixing it. They are well aware that for much of the time they have been buying here their vacancy rate has hovered between 30 and 50%. They have cost over-runs, missing supplies, poor oversight and a very poorly performing portfolio when compared to other cities where they have hit homeruns.

      So your initial response was spot on and the best funds are starting to realize it.

      I wrote my article almost two weeks ago and had it in queue waiting to be published. By pure dumb luck, yesterday an L.A. based writer co-authored an article for Bloomberg where the best of the best painted a bleak picture and others are releasing less than stellar results. Then along comes this article today:


      Take your time and read both. They are interesting articles and they give you insight into the lessons that the funds and learning the scary (yet potentially profitable) opportunities that may await us as individual investors soon.

      Thanks for taking the time to read and comment.


  14. In our real estate market, we’re seeing investors buying 20 and 30 homes each per month – which is historically an incredible amount for our area. As our inventory continues to decrease and prices continue to increase, I’m worried about the impact it will have on our market in the next 6 months to a year.

    • Chris Clothier

      Hey Lee –

      Without knowing your market, I can only say in general that a fund buying a lot of properties can be both very good and very bad. It does take property off the market and allow for investors to find niches where they can make money. Funds are not buying everything (I say that, but in cities like Tampa they will tell you that is exactly what funds are doing). There is room for investors.

      On the bad side, if a fund partners with someone who does not have the experience or the team to handle a quick influx, it can have disastrous results. Essentially properties get pulled off the market, but nothing happens with them for months which is exactly what is happening here in Memphis in some scenarios.

      The thing is, the funds know what their problems are and many mid-sized funds are simply trying to prepare their portfolios for sale as soon as possible. They are all angling for an end-game and if you have the wrong team on the ground or are not willing to over-capitalize to fix the problems, then selling what you have will be the next best thing.

      I don’t know if you should worry about your local market or not, but i will tell you that the introduction of an aggressive fund sure makes the business more “interesting”.

      Thanks so much for reading and writing your comments!


  15. Glenn Schworm

    Hey Chris,

    Interesting article. We do not have any Hedge Funds buying in our area so I have no experience and found this article very informative. Even with your apparent faceless heckler. 🙂 I am amazed at how much over asking they pay?? Wow, does not seem to make smart business sense. Thanks again Chris. Have a great weekend!

    • Just for the sake of accuracy Glenn the fund did not pay 50% over asking as Chris claims. The property was listed on auction.com for an opening bid of $10,000. This is very common and is no reflection of the reserve they will accept. The facts are that they paid 15K less than Chris did for ostensibly the same property, (albeit slightly smaller and inferior cladding) on the same street.
      No heckling going on, simply a desire to prevent misinformation being presented as facts.

        • Hi Glenn. I supply the fund, (and many other companies) with homes. I don’t work for them but I do happen to work out of their office. Nothing to get in the middle of, I enjoy the conversation. I think Chris company does an incredible job of rehab and marketing and are a real asset to the city. I just like facts to be right that’s all and we all learn more by drilling into these things!

    • Chris Clothier

      Hey Glenn –

      Thanks for reading the article and taking time to leave your comments. All of us, including you in your city, can pick houses where funds grossly overpay. Hell, the funds themselves are starting to come to this realization and some of the biggest are getting out for what they term as “stupid” money entering the single-family rental business. We laugh in our offices on a weekly basis over the prices being paid by both large hedge funds operating in the open and smaller funds that are flying under the radar. It is easy to overpay when you have quotas to hit and you can aggregate those mistakes into a larger portfolio with good buys. I still think the bigger issue is houses sitting half rehabbed with rental signs in front of them…for months! Overpaying is built into the equation, but sky high vacancies for months on end and poorly renovated properties that are essentially unrentable as is, were never part of any funds plan when entering markets.

      As for the heckler, he is not faceless. It’s Dean Letfus, a self styled real estate guru from New Zealand and we met two years ago. I will amicably describe our meeting as a mutual decision not to do business together, but for some reason he likes to prick. I actually know why and it is as stupid as a group of middle school girls having a gab fest. I’m not friends with his friends! LOL – I’m not kidding Glenn. That is what it boils down to. He seems to like to come on articles I write and sound very authoritative. Like I said, it mostly makes me laugh.

      Anyway, I’m sure he is a nice enough guy and I am cordial and always will be, but I don’t put a lot of time into what he says and I’m sure he is the same way towards what I say. It is what it is.

      Glenn, all the best to you and thanks for the really good articles you’ve been posting here lately. I have ben sharing all of them with our followers and through social media. You, Jeff and Ali have all really brought your “A” games here lately (and I don’t mean to leave anyone else out that has been writing some good stuff on here). Keep it up!

      Enjoy your weekend as well.

      • Glenn Schworm

        So is it safe to say you guys won’t be dating anytime on the near future? LOL I can feel the tension here in NY! I have to ask…2nd paragraph, 3rd line, “he likes to prick” or should that have been “pick”? Freudian slip?? LOL. Thanks for the props, look forward to staying in touch.

        • Melodee Lucido on

          lmao!! I got up extra early to get caught up on marketing—-saw all the “new comments” in my inbox about the most recent Clothier hit show called “Hedges”. lol

          I was racing, thinking I’ve got to get to work!! But Glenn your reply pushed me over the edge, had to come and thank you for the GREAT giggle. And Chris, how the heck are you finding time to work with having to answer all these replies?!? hahahahaha

          Thanks all this has been fun and educational. Chris I look forward to the next article : >

        • Chris Clothier

          Hey Glenn –

          I should probably ratchet this down a notch since a majority of the comments including Dean’s are off-topic. When we met he didn’t need my services and I didn’t need his – that is why we don’t do business together. I have no problem with him personally and though I doubt it would happen, I am always up for a coffee or beer to see if we share any common ground. I meant prick – as in a pin prick. Small and mildly irritating comments on my articles, other blogs and social media sites – Nothing more than that.


  16. Hi Chris.

    You handle your hecklers very well & professionally!! Love it!!!

    Thanks for the awesome Article and shedding light on the good, the bad and the ugly in the Hedge Fund real estate game.

    On a positive note, I know a fellow investor who is a great gal & recently had a tough time selling a flip property (due to a multitude of reasons I won’t explain) but a Hedge fund came in and purchased the property at full price for cash. In this one particular case, after everything she had been through, they ended up being a blessing.

    Thanks for this very informative article & for your masterful heckler handling!! 🙂 🙂 🙂
    Lisa G.

    • Chris Clothier

      Lisa –

      Awesome comment! A great illustration of one of the first sentences in the article. Funds have been both good and bad for markets. I have to try and keep my articles from getting too long so I limited myself to only a few sentences about the specific goods that have come from funds, so I am glad you shared your comment. IN many markets, there are funds that are buying brand new homes and even owner occ homes in hopes that this will alleviate rental and upkeep problems. Only time will tell if that is a good strategy or not, but I am hearing more and more from people that are selling much higher price points and much nicer homes to funds directly.

      Thanks again for reading and commenting on the article.


  17. Chris Clothier

    Melodee –

    This is what I do for our company…promote and protect our brand. I love talking to other investors and sharing thoughts, information, data and observations. I know, I know…it hardly seems like work to sit around all day and “talk” real estate, but it is the role I play in our company and the relationships, reputation and trust that we have absolutely earned through the years is very important to us. So that is why I get so engaged. However, in regards to the comments on this particular article, I quickly realized that I was being drawn into a conversation that was pointless and was going to take me away from the important comments and thanking readers for reading and commenting on my articles on the BP blog. This article was never about any one particular company, fund or any particular houses. It is about a systemic failure on the part of the industry that many of us refer to as “hedge funds” to figure out how to turn single-family rentals into a new class of securities. In the end, some will figure it out, some will make money on the way to others figuring it out and some will do neither – they will lose money and exit the single family rental market as gracefully as possible!

    Enjoy your Friday! Thanks again for reading and writing your comments.


  18. Robert Levaro on

    Thank you for a wonderful article and such great facilitation of the large number of comments. I wanted to underline one of your points -the maintenance shortcuts of some operators– that I find vital in my market: Phoenix AZ. Most properties built here in the last 15 to 20 years are in HOA communities. Because of our extreme weather conditions most HOAs have front yard landscaping requirements that the homeowners must adhere to, both in terms of the types and amounts of plantings and their maintenance. Many of the institutional buyers either by design or oversight ignore and flaunt these requirements. Even to the point of pulling grown trees out of the ground so that they won’t have to water and prune them. They then turn around and threaten to sue the HOAs into bankruptcy if they fine them for non-compliance. The Arizona legislature has also received the memo from wall street and is in the process of busting HOAs’ ability to enforce ANY rules. As a neighboring homeowner to such institutionally owned properties it breaks my heart to see wanton destruction of value in the name of more “frictionless” property management. As a responsible landlord, I have sometimes felt that the HOAs were a thorn in my side. However, now that I see the impact of other owners’ complete disregard for these community design and maintenance standards I have become a true believer. Whatever the financial outcomes for these organizations good or bad, they have already began to scar our communities. This may be their most lasting legacy.

  19. Great Article Chris. I agree with a lot of the opinions and facts you have written. It will be interesting to see how it all plays out. I have been saying all along i don’t see how the behemoths will be able to manage the single family rental markets while earning healthy returns for their investors.

  20. Funny how Chris maintains professionalism until his article is challenged by Dean.

    Everyone else gets a, “Thanks so much for reading and writing your comments!”

    Anyways, yes, in a sentence the article could state: Just like traditional landlords or REI’s, some hedge funds will fail and some will succeed. Great article.

    Now then, just tell me who are the hedge funds who buy SFHs. I’ll make some phone calls and find out who my local acquisitions manager is, and I’ll wholesale him a butt-load of houses. Why don’t we capitalize on a huge buyer of SFHs.

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