BIZMOLOGY — A new class of real estate investment trusts (REITs) has formed to invest in single-family homes rather than their typical fare of office, industrial, multifamily, and retail buildings. REITs traditionally have steered clear of investing in single-family homes. However, low home prices and high renter demand have made buying large numbers of houses and then renting them out an attractive investment strategy for large-scale investors.
There are 14 million homes for rent in the country, with an average price of $200,000. That creates an industry value of about $2.8 trillion, according to Goldman Sachs Group. Demand also is growing as homeownership is now at an 18-year low of 65 percent. The downturn has turned many people into renters, who now occupy 35 percent of single-family homes. That’s up from 30 percent in 2005.
While the single-family home leasing market is appealing, there are some challenges. It is a highly fragmented industry that has been traditionally dominated by small business owners. It also is management-intensive, and investors must juggle home repairs, leasing agreements, and other issues with individual homes. But that hasn’t stopped several companies that are eager to get in on the ground floor of an emerging investment trend.
Four such companies recently have either gone public or plan to enter the market in the US. Most of these REITs acquire distressed properties via foreclosures, auctions, sales listings, and bulk purchases, then restore the properties and lease them out. Most hope to profit from buying low, renting high, and, if need be, selling for a profit based on former value.
Waypoint Homes, a REIT that filed to go public in May, intends to build a portfolio of 10,000 leasable single-family homes in select major markets, including Chicago, Atlanta, and Phoenix, as well as cities in California and Florida. Another such company, American Residential Properties, with a portfolio of some 1,700 properties in Arizona, California, Florida, Georgia, Illinois, Nevada, and Texas, went public earlier this year. Silver Bay Realty Trust, which focuses on buying single-family homes in urban markets with an oversupply of housing, was the first single-family REIT to go public in 2012. While both of the last two companies have not seen big improvements in their stock prices since going public, neither has leased out all of its portfolio, so each has room to grow results.
Colony American Homes, another REIT set up to manage and lease single-family homes, recently postponed its public offering seeking to raise $100 million. The company cited poor market conditions for the postponement. Industry experts said the delay was likely due to increasing interest rates and falling REIT share prices. It’s a big hint that the single-family REIT model is risky and not all companies may be ready to meet the demands of investors.
Meanwhile, American Homes 4 Rent, a company owned by the founder of self-storage giant Public Storage, filed its IPO paperwork with the SEC and is looking to raise up to $1.25 billion.
These REITs aren’t the only companies looking to cash in on single-family home leasing. Other large-scale investors also have invested in rentals. Private-equity giant The Blackstone Group has spent more than $5 billion on more than 30,000 homes across the country. And the company is expanding its venture in housing by lending to other landlords through its B2R Finance company. Former Goldman Sachs executive Donald Mullen also has raised about $1 billion to buy single-family homes to rent through his Pretium Partners, LLC.
Most of these investors are focusing on buying homes in previously troubled markets. Some industry experts have suggested they have helped inflate sales prices by reducing supply and supporting a shift in perception that the housing market is rebounding solely with the help of regular home buyers.
The emergence of Wall Street investors into the single-family home leasing market is a rather new concept and it is still too early to tell if results will be beneficial. Potential problems include rising interest rates. While many REITs have used cash to buy most of their properties, some plan to use credit for future investments. Any debt that the REITs have face increases in interest expense, and that could impact financial performance.
Also, competition is strengthening as more investors enter the market and the supply of homes shrinks. There are fewer foreclosures and, as a result, fewer distressed properties waiting to be snatched up at low prices.
REITs looking to capitalize on trends in the housing market may diversify into single-family home investments that will appreciate in value. The strategy is risky and the task of maintaining large amounts of homes is difficult, but if demand for single-family homes continues and values remain favorable, REITs could benefit.