I read an interesting article in the Wall Street Journal yesterday about the renting market versus the owning market. While the scene is in California, this can be very similar here in SW Florida and especially in Cape Coral and Lehigh Acres.
Agustin Gutierrez, a construction worker from this town in the hills northeast of San Francisco Bay, lost his job in 2009, then, 10 months later, he lost ownership of his home.
Now, the husband and father of 4 rents the identical five-bedroom ranch from McKinley Capital Partners, an investment company that is at the forefront of a brand new breed of big-money landlords.
McKinley, which has acquired more than 300 foreclosed single-family houses in the Bay Area over the past two years, lately teamed up with Och-Ziff Capital Management Group LLC, a new York hedge fund, with plans to buy at least 500 more foreclosed houses in the subsequent year. Those homes, too, will probably be rented to people like the Gutierrez loved ones.
Acquiring foreclosed homes as investment properties has long been dominated by mom-and-pop investors. But now hedge funds, private-equity firms, pension funds and university endowments are dipping into that market place. The attraction is double-digit returns at a time when most bonds along with other income investments yield extremely small.
Essentially the most well-liked strategy is for a large investor to team up with a neighborhood organization that scouts out houses and finds the renters. The hope would be to flip the homes within the future when prices recover.
“It’s kind of the Wall Street meets Principal Street phenomenon,” says John Burns, an Irvine, Calif.-based real-estate consultant who has discussed investing in single-family rentals with hedge funds. “The Major Street guys need to have the capital, and Wall Street requirements the expertise.”
At the finish of May possibly, 3.five million loans had been at least 90 days delinquent or in foreclosure, based on investment bank Barclays Capital. In the very same time, the country’s house ownership rate has fallen, to 65.9% inside the second quarter of 2011 from its peak of 69.2% in 2004, based on figures released by the U.S. Census Bureau final month. That drop has produced millions of new renters and helped push the vacancy rate for rental housing down by about two percentage points, to 9.2%.
“The single-family rental market is truly very large,” said Dennis McGill, director of investigation at Zelman & Associates, a study firm that follows the housing market place. “The average American says, ‘If I’ve got two kids and a dog, I can’t live in a one-bedroom apartment.’”
Zelman lately issued a report saying that in Arizona, Florida and Nevada, states hard-hit by the foreclosure crisis, the number of families renting a single-family house increased 48% from 2005 to 2010.
Huge institutional investors could eventually help stabilize the marketplace by soaking up the huge overhang of foreclosures, which could allow housing to begin healing. However, the number of single-family houses being bought by institutional investors is still small compared to the millions of distressed properties. The biggest players in the industry are deploying hundreds of millions of dollars, not the billions necessary to make a major dent.
The federal government has a significant role as well. The Obama administration is currently considering ways of selling foreclosed houses to investors who agree to rent them out. Fannie Mae and Freddie Mac and the Federal Housing Administration own a lot more than half of all unsold foreclosed houses.
Being a landlord can be a costly hassle for significant investors. Unlike apartment complexes, which concentrate hundreds of rental units in one place, investors must obtain hundreds of single-family houses that are miles apart, each with separate maintenance problems. Tenants can be troublesome.
“You could have a bad tenant who doesn’t want to pay their rent, or maintain the pool,” says Guy Johnson, an investor who buys foreclosed properties in Nevada, Arizona and California and rents some of them out. “A hedge fund manager doesn’t want to have to be their own plumber or electrician.”
Purchasing foreclosed properties isn’t easy either. Investors sometimes have to pay thousands of dollars in “cash for keys” payments to the previous homeowners in order to entice them to leave the property, and foreclosed homeowners often damage their houses before they are evicted.
Private-equity giant Carlyle Group LLC tried its luck with the single-family property market two years ago but abandoned the strategy late last year after concluding that the returns weren’t big enough. Carlyle’s method was different. The organization formed partnerships with nearby asset managers in California that bought and flipped houses, rather than renting them.
For now, a lot more investors are plunging into the single-family rental marketplace. McKinley, the Oakland, Calif., business that owns Mr. Gutierrez’s house, has already begun to use Och-Ziff income to purchase houses. Its model would be to acquire houses at an average price of about $100,000 apiece, put between $10,000 and $25,000 in renovations into them, and set the rental rate of the house so that it produces a return of 8% to 12% annually. This often works out to a rent of roughly $1,200 per month.
McKinley and Och-Ziff could see additional returns from selling the houses at a higher price after a few years, once the market place has improved. “Two years ago no one thought you could scale this business or that it could be institutionalized,” stated Gregor Watson, a principal with McKinley. “Now, you can get extremely good yields. It’s a quite good long-term strategy.” He declined to comment on the Och-Ziff investment. Och-Ziff also declined to comment.
Other significant investors have formed rental-housing partnerships.
G8 Capital, a private-equity fund based in Ladera Ranch, Calif., has bought 3,000 houses across the country since 2008, mostly to flip them. It decided last year to begin pursuing a hold-and-rent technique. It has since bought 250 foreclosed houses as rentals. Carrington Property Services LLC, a Santa Ana, Calif.-based property investment business that manages about 4,500 houses nationally, is in talks with investors to raise funds for a real-estate investment trust, to be called Residential National Trust, which would acquire foreclosed houses for rental. The company plans to purchase as many as five,000 far more rental homes in markets including Chicago, Miami, Phoenix and Las Vegas.
Waypoint Genuine Estate Group, an Oakland, Calif.-based firm, has bought 700 houses within the past two years as rental properties. Doug Brien, a former place kicker for the New York Jets who is now managing director of Waypoint, says that his company has approached pension funds, university endowments and big private investment groups about investing in his fund. In July, he says he closed on a financing deal from an Ivy League university endowment, but declined to name the university.
“At some point, there is going to be a shortage of housing,” Mr. Brien mentioned. “Everyone is realizing that single-family buy-and-hold is the way to go.”
In November, hedge fund manager William Ackman’s Pershing Square Capital Management LP released a report arguing that single-family rental properties are an “under-owned asset class” that would make “an intelligent investment for institutional investors.” Pershing Square predicted that investing in single-family houses and holding them as rentals for 10 years could produce double-digit investment returns, even if U.S. residence costs only improved marginally.
All the activity is fueling a renewed debate over whether investors are good or bad for the housing industry. In the early days of the housing bust, some community groups discouraged banks from selling foreclosed houses to investors for fear they wouldn’t take proper care of the properties. Some communities riddled with foreclosed houses became slums.
Alan Mallach, a senior fellow with the Brookings Institution in Washington, argues that instead of running from investors, local governments should provide subsidies to investors who buy, rent out and are good landlords for foreclosed properties. “If a neighborhood has a high rate of residence ownership, that’s obviously better,” he stated. “But in some markets, there was so much inventory coming on the market place that the sheer number of properties was destabilizing those markets.”
Mr. Gutierrez, the Vallejo construction worker, now pays $1,800 a month in rent, compared to the $2,500 per month he was paying to cover the cost of his mortgage when he owned the house. He says it bothers him that he no longer owns his property, but is happy to pay less and says his new landlords are good property managers.
He bought the house in 2003 for $340,000 using a $322,700 loan. He refinanced the house 5 times, driving up the total amount of debt on the house to $400,000. He lost the house to foreclosure in 2009. McKinley paid about $155,000 for the house that year.
“It’s confusing, because sometimes I think it’s my house, but I have to remind myself that it’s not,” mentioned Mr. Gutierrez, who says he doesn’t plan to try to repurchase the house. “It’s sad, but it’s what happened to a lot of men and women.”
Aug 06 2011
