There is a new investment opportunity that has been getting increasing amounts of attention in the financial press and investment community. Buying single family homes to rent may be turning into an attractive option for individual investors seeking decent yields in a low interest rate environment. Some institutional investors like hedge funds and private equity funds have been investing in this new asset class in recent years and individual investors were given an opportunity to invest in the asset class for the first time via two new REITs (SBY, RESI) in December of 2012, with more IPOs expected in coming months. There are others active in the space including Canadian (TCN.T) and Australian (URF.AU) public firms, as well as publicly traded private equity firms (BX, CLNY), along with home builders (LEN and BZH partnered with KKR).

This new real estate asset class has likely had some impact (that may grow going forward) on a number of areas that have been in the news relating to the Global Financial Crisis.

1. Home prices dropped sharply after 2006/2007 resulting in mass foreclosures, underwater homeowners (see 3/19/2013 WSJ article and graphic), mortgage and related fixed income losses, and negative impacts on the economy (particularly construction).
2. Interest rates are at or near all time lows and retired investors and savers are searching for reasonable yields on their investments.
3. To support the housing market, the US Government (through numerous entities including Fannie Mae, Freddie Mac, and FHA) has taken a large role in supporting housing, yet many would like to see that footprint reduced much more.

There have been many informative articles and financial disclosures from public companies, so there is no need to re-write the story. Instead, I've created a list of relatively large firms apparently active in the space, along with quotes, excerpts, and links on the subject.

Quotes and excerpts

• "The business of buying-and-renting houses, long dominated by local mom-and-pop investors, has morphed over the past two years into one of the hottest investments on Wall Street."

  2/20/2013 - Foreign Buyers Hop on Rental Trend (WSJ)

• "This is the best new opportunity in pension fund investing in real estate in a very long time."

  2/13/13 - Paul Saylor in Billionaire Hughes Chasing Blackstone as U.S. Rental King (Bloomberg)

• Whether the single-family rental market grows from “a $10 to $20 billion market to a $100 to $200 billion market” will depend “on how successfully institutional investors are able to execute over the next few years

  2/13/13 - Sandeep Bordia in Billionaire Hughes Chasing Blackstone as U.S. Rental King (Bloomberg)

• The single family rental market was large even before the housing crash, with sixteen million homes designated as rentals in 2010, according to the U.S. Census. Add to that at least five million foreclosures, many of which will become investor-owned rentals, and the enormous scale is apparent.

  1/9/2013 Meet America's New Landlords: REITs (CNBC)

• By some accounts, $6-9 billion has been raised or committed, suggesting potential acquisitions of 40,000-90,000 properties ... We expect the REO-to-rental market to experience robust growth over the next 12-24 months, potentially emerging as an institutional asset class.

  1/9/2013 - Jade Rahmani in Meet America's New Landlords: REITs (CNBC)

• While mom-and-pop businesses have been buying, renovating and renting out homes for years, major investors backed by private-equity and hedge funds only began amassing single-family homes within the past couple of years.

  9/17/2012 - Boost for Foreclosure Market (WSJ)

• Investors can buy stakes in malls, apartment towers, timber forests and even cellphone towers through real-estate investment trusts. Now, add to the list: single-family homes transformed into rental properties.

  5/8/2012 - Builder Is Constructing REIT for Home Rentals (WSJ)

• I'd Buy Up 'A Couple Hundred Thousand' Single-Family Homes If I Could

  2/27/2012 - Warren Buffett (CNBC)

• "Its the right thing not only for our investors, but the country at large"

  Blackstone Invitation Homes video

Prominent organizations publicly identified as active in the asset class

1. Blackstone Group (BX) (Invitation Homes platform) has spent more than $3.5 billion to buy 20,000 single-family rentals (prior estimates were $3 billion, and $2.7 billion on 17,000 properties) and plans to continue ramping up those efforts in 2013. Blackstone has reportedly been buying in Atlanta, Chicago, Las Vegas, Phoenix, Northern and Southern California; Miami, Orlando and Tampa, Florida and has a $2.1 billion (up from $600 million) line of credit from Deutsche Bank. Source1 3/18/2012 (Bloomberg), Source2 2/4/2013 (Money), Source3 2/4/2013 (Alternet), Source4 1/9/2013 (Bloomberg), Source5 12/9/2012 (NYT)
2. Wayne Hughes and American Homes for Rent owns 10,000 single-family houses (Arizona, Georgia, Nevada, Texas, Illinois and Indiana, according to American Homes 4 Rent’s website, and also bought houses in Colorado, North Carolina, Florida, Ohio, and California per RealtyTrac). The majority of homes it bought in 2012 were through foreclosure auctions. Plans to go public (2/27/2013). Source 2/13/2013 (Bloomberg)
3. Colony Financial (CLNY - Colony American Homes), headed by Thomas Barrack, has roughly 7,000 homes in Arizona, California, Colorado, Florida, Georgia, Nevada and Texas and hopes to reach 10,000 by spring. Source1 (3/7/2013), Source2 12/9/2012 (NYT) Source3 9/17/2012 (WSJ)
4. JPMorgan started pooling investments from its clients in mid-2012 into a partnership to purchase distressed properties with more than 5,000 single family homes to rent in Florida, Arizona, Nevada and California. The goal is to sell the houses within three to four years in one of three ways: through an initial public offering of a real estate investment trust, a sale to an existing REIT or to an institutional buyer. Source (2/4/2013) Bloomberg
5. Waypoint Homes owns more than 3,000 rental homes (California, Phoenix, Chicago and Atlanta areas) and expects to have 10,000-11,000 by the end of 2013 (Citigroup extended a $245 million line of credit and GI Partners, a private-equity firm, invested $250 million in Waypoint). Source 9/17/2012 (WSJ)
6. Silver Bay Realty Trust Corp. (SBY) an arm of Two Harbors Investment Corp. (TWO), raised $245 million in an initial public offering in December and acquires, renovates, leases and manages single family homes. They have an acquired portfolio of over 3,400 Single-Family Properties and the company achieved an occupancy rate of 96% and an average monthly rent of $1,148 on 1,779 properties that were stabilized as of December 31, 2012 (reportedly over 4,000 3/18/2013). Previously, SBY had purchased more than 2,500 homes in areas hard hit by the housing crisis and in an SEC filing said that it plans to purchase 3,100 more homes. Source1 press release 2/28/2013, Source2 2/20/2013 (WSJ) Source3 2/4/2013 (Money)
7. GTIS Partners planned to spend $1 billion by 2016 acquiring single-family homes to manage as rentals. GTIS, which has invested $225 million in partnerships with homebuilders such as Hovnanian Enterprises Inc. (HOV) since 2010, will hire in-house staff to manage the rental properties in each area. Source 1/31/2012 (Bloomberg)
8. Tricon Capital Group Inc (TCN.T) a Toronto-based asset manager, launched a single-family rental investment platform in early 2012 and has since spent $160 million acquiring nearly 2,000 homes (California, Arizona, Florida and North Carolina) and it hopes to own between 3,000 and 4,000 homes by the end of 2013. Source 2/20/2013 (WSJ)
9. American Home Real Estate Investment Trust owns close to 2000 properties in Georgia, North Carolina and Florida, and plans to continue buying more. Source 1/9/2013 (CNBC)
10. Altisource Residential Corporation (RESI) has 1,500 rental homes in five states. Source 2/13/2013 (Bloomberg)
11. Oaktree Capital Management reportedly planned to spend $450 million on housing. Source1 10/17/2013 (Reuters), Source2 1/31/2012 (Bloomberg)
12. Delavaco Properties (Toronto-based) began buying foreclosed homes in the U.S. in 2010, and renting them out to tenants, 68% of whom use Section 8 vouchers, a federal rent-subsidy program for people with low income. So far, Delavaco has bought 557 single-family homes in South Florida, and according to the firm's website, plans to own 1,500 by the end of 2013. Source 2/20/2013 (WSJ)
13. Rialto Capital Management LLC, a unit of Lennar Corp. (LEN) that invests in distressed debt, has rented out some of the 300 single-family homes it has acquired from buying distressed loans from the Federal Deposit Insurance Corp. Source 3/20/2012 (WSJ)
14. Beazer Pre-Owned Rental Homes Inc., a unit of Beazer Homes (BZH) along with Kohlberg Kravis Roberts & Co. (KKR) announced plans to form a REIT which eventually plans to go public (after the company's assets reach at least $150 million). It hopes to expand beyond Phoenix and Las Vegas to at least one other. Within two years, Beazer said the number of rental homes under the new REIT's control could number in the thousands. Beazer contributed the 192 homes, which have a market value of about $20 million, to the new company, and KKR, along with other investors, has contributed another $65 million. Source 5/8/2012 (WSJ)
15. US Masters Residential Property Fund (URF.AU) raised $276 million with a primary strategy of investing in direct US residential property. It is reportedly the only major player focused on the New York metropolitan area with a buy-and-hold approach. Source1 2/20/2013 (WSJ), Source2 12/5/2012 (Costar)
16. Cashel (partners with an Australian investment bank) has bought 200 homes and hopes to expand to 2,000 homes in the next 2˝ years. Source 2/20/2013 (WSJ)
17. American Residential Properties Inc. said on Dec. 5 that it probably will file this quarter to go public. Source 2/27/2013 (Bloomberg)
18. McKinley Capital Partners LLC has invested $70 million in the past 18 months, buying more than 400 foreclosed homes in the San Francisco Bay Area and other western U.S. cities. Source 9/12/2011 - (Bloomberg)
19. TwinRock Partners was seeking as much as $50 million to buy and rent foreclosed houses in Riverside and San Bernardino Counties east of Los Angeles. TwinRock’s initial $6 million fund returned 8 percent in its first year on the 38 homes that cost average $147,000 after renovations, according to an investor presentation. Source 9/12/2011 - (Bloomberg)
20. U.S. Residential Asset Fund offer tenants a rent-to-own option. The fund expects to invest more than $20 million in distressed single-family housing over the next two years, beginning in Charlotte, Memphis, and Chicago metro areas. Phase two acquisitions will be in Atlanta, Indianapolis, Tampa and Orlando. Source 12/5/2012 (Costar)
21. Sylvan Road Capital (See Research by Oliver Chang, formerly at Morgan Stanley) owns hundreds of homes in the Atlanta area and has an investment from Carlyle Group (CG) Source 12/4/2012 (WSJ Blogs)
22. Haven Realty Capital is a property manager/investor backed with capital from Leon Black’s Apollo Global Management LLC (APO) that operates in the traditional multi-family, 2-4 unit rentals, and single family rental markets. Source 3/18/2012 (Bloomberg)
23. Och-Ziff Capital (OZM) reportedly started selling the single-family homes it bought since the recession began. Source1 10/17/2012 (Reuters), Source2 12/9/2012 (NYT)
24. Landsmith was an early buyer that has reportedly since sold some of its rental homes in Phoenix, but has acquired about 300 homes in Las Vegas and in Atlanta. Source1 3/18/2012 (Bloomberg), Source2 9/12/2011 - (Bloomberg)

Discussions and projections for expected returns

• The kind of apartments sought by institutional investors, usually properties with 50 units or more, are priced to deliver internal rates of return, a measure of investment yield used by private equity firms, of almost 7 percent, according to [Ray] Huang [Green Street Advisors]. Return expectations for single-family rentals ought to be more like 7.5 percent to 8 percent to compensate for greater risk, he said. Source 3/1/2013 (Bloomberg)
• Tricon Capital Group Inc (TCN.T - Toronto-based asset manager) launched a single-family rental investment platform in early 2012 and has since spent $160 million acquiring nearly 2,000 homes in California, Arizona, Florida and North Carolina. A Tricon spokesman said the company's net yields are in the 8% to 9% range. Source 2/20/2013 (WSJ)
• The American Homes 4 Rent venture should yield unleveraged returns of 6 percent to 7 percent from rents, before home prices and rents rise, according to Michael Burns. By comparison, high-yield, high-risk company debt, or junk bonds, are yielding about 6.6 percent. Source 2/13/2013 (Bloomberg)
• Analysts at KBW estimate cash returns on investments in REOs are in the 5-7 percent range, while total returns could reach 15-20 percent. Source 1/9/2013 (CNBC)
• Economists at Goldman Sachs estimate the annual yield on an investment on rental property nationwide averages about 6.3%, but can exceed 8% in cities that were hit hard during the housing bust, including Las Vegas, Detroit and Tampa. By contrast, mortgage bonds have average yields of just over 3%, and investment-grade corporate bonds are yielding about 3.5%, according the Barclays Capital U.S. Investment-Grade Index. Source 3/20/2012 (WSJ)

The market opportunity

• In January, investment bank Keefe, Bruyette & Woods estimated that institutional investors had raised between $6 billion and $9 billion to buy U.S. houses and convert them into rentals. Source 2/20/2013 (WSJ)
• "By some accounts, $6-9 billion has been raised or committed, suggesting potential acquisitions of 40,000-90,000 properties," according to Jade Rahmani, an analyst at KBW, who pointed out that this amounts to around 15 percent of unsold bank-owned, so-called REO (real estate owned), homes. "We expect the REO-to-rental market to experience robust growth over the next 12-24 months, potentially emerging as an institutional asset class." Source 1/18/2013 (WSJ)
• Demand for single-family home rentals has always been there: it represents 33 percent of home rentals, according to Green Street. Until now, though, most rentals were handled by small-time landlord-entrepreneurs (5-10 homes) per Bob Curran at Fitch Ratings. Source 12/9/2012 (NYT)
• According to Census Bureau data analyzed by Green Street Advisors Inc., there are about 25.5 million single-family rental properties—defined by Green Street as houses with between one and four units—in the country, compared with just 18 million rental apartments in buildings with five or more units. Source 5/8/2012 (WSJ)
• Barclays Capital estimates 800,000 former owner-occupied homes are being converted to rentals each year (last year a total of 4.3 million previously owned homes changed hands) Source 3/20/2012 WSJ

Links and Sources regarding buying homes to rent as an investment asset class

• 3/18/2012 - Blackstone Crowds Housing Market as Rental Gains Slowing (Bloomberg)
• 3/1/2013 - Carlyle Avoids Mowing Lawns in Housing Rebound: Mortgages (Bloomberg)
• 2/28/2013 - 4Q2012 Earnings Presentation and 4Q2012 Conference Call. Silver Bay Realty (SBY) Prospectus (12/12/2012)
• 2/27/2013 - American Homes 4 Rent to Sell Shares in Public Offering (Bloomberg) The company will submit a registration statement with the U.S. Securities and Exchange Commission within 60 days. American Residential Properties Inc. said on Dec. 5 that it probably will file this quarter to go public.
• 2/20/2013 - Foreign Buyers Hop on Rental Trend (WSJ)
• 2/13/2013 Billionaire Hughes Chasing Blackstone as U.S. Rental King (Bloomberg)
• 2/7/2013 Altisource Residential Corp (RESI) 10K - We currently intend to acquire single-family properties primarily through the acquisition of sub-performing and non-performing loan portfolios ... Our competition includes other REITs, pension funds, insurance companies, hedge funds, investment companies, partnerships and developers ... We also face significant competition in the single-family rental market from other real-estate companies, including REITs, investment companies, partnerships and developers.
• 2/4/2013 JPMorgan Joins Rental Rush For Wealthy Clients: Mortgages (Bloomberg)
• 2/4/2013 The Ugly Truth About America's Housing "Recovery" -- It's Wall St. Buying Homes to Rent Back to Their Former Owners - The housing “recovery,” as they’re calling it, is fueled almost entirely by Wall Street private equity firms, hedge funds and the Fed's unwavering support.
• 2/4/2013 - Big money betting big on housing (Money)
• 1/18/2013 - Rental Bonds Hit Snag (WSJ)
• 1/9/2013 Meet America's New Landlords: REITs (CNBC)
• 12/9/2012 Big Money Bets on a Housing Rebound (NYT)
• 12/5/2012 Appeal Keeps Building for Still Unproven Investment In Rental Housing Market (Costar)
• 10/17/2012 Exclusive: Och-Ziff hedge fund looks to exit landlord business (Reuters)
• 9/17/2012 Boost for Foreclosure Market (WSJ)
• 7/20/2012 Plotting a Securitization Sequel (WSJ) - firms such as Colony American Homes and Waypoint Homes have snapped up houses in foreclosure and rented them. Backed by investment banks and credit-rating firms, these firms think they have spotted a new opportunity: Packaging thousands of those rental payments into securities and selling them to other investors, a process known as securitization.
• 5/8/2012 - Builder Is Constructing REIT for Home Rentals (WSJ)
• 3/20/2012 - Wall Street Keys On Landlord Business (WSJ)
• 2/27/2012 - Warren Buffett on CNBC: I'd Buy Up 'A Couple Hundred Thousand' Single-Family Homes If I Could (CNBC)
• 1/31/2012 - Foreclosures Draw Private Equity as U.S. Sells Homes (Bloomberg)
• 1/12/2012 - Six Questions on Foreclosure-to-Rental Programs (WSJ Blogs)
• 9/12/2011 - Investor Support for Housing May Suffer in Obama Rental Plan (Bloomberg)

Some commentators are skeptical that buy to rent investors are a positive development and have noted 1) some like Och-Ziff Capital have already decided to sell, plus 2) we have evidence that in some locations the influx of buy to rent investors has resulted in excess supply of rental homes and downward pressure on rents. For instance this article Is The "Buy to Rent" Party Over? by Tyler Durden/Michael Krieger on 03/18/2013 (previous 10/17/2012 comments) points to the government's REO-To-Rental plan and suggested "Och Ziff is the first to wave goodbye... ... but it won't be the last. Expect all other subsidized "buyers" in the space to proceed to dump their properties en masse shortly." Others taking a cautionary stance include the following.

• Housing Bubble II: But This Time It’s Different 3/18/2013
• Santelli: What's Blocking Housing Recovery? 2/19/2013 - Ed Pinto suggests investors buying rental properties represents "Hot Money".
• Your New Landlord Works on Wall Street 2/12/2013
• The Ugly Truth About America's Housing "Recovery" -- It's Wall St. Buying Homes to Rent Back to Their Former Owners 2/4/2013
• Matt Taibbi comments 3/19/2012

I think there is a good possibility that the newer, longer-term oriented own to rent firms (driven by both institutional and retail demand) will in aggregate outweigh any selling pressure from short-term oriented institutional sellers. The relatively favorable response to the SBY IPO along with announcements by others of their intention to go public are indications that demand is developing for long-term income oriented REITs in the space. I suspect some of the creators of the firms entering the space see a long-term revenue stream potential in the creation and management of the portfolios of properties.

From an investment perspective, I think the home rental investments may be particularly interesting for individuals that don't own homes, especially those that are planning to buy a home in the future. Those individuals can attempt to hedge against rising home prices by buying a stake in a rental homes firms (similar to one of the potential planned uses of the real estate futures conceived by Robert Shiller). The asset class also has the potential to smooth out real estate price moves in the future (others argue that the short-term oriented investors may move in tandem thus destabilizing prices). If prices rise too much relative to rental rates, rental homes can be sold adding to the supply and potentially reducing prices. If prices drop relative to rents, more homes can be converted to rentals, reducing the supply and potentially increasing home prices.

While there is a massive standard markets for individual homes (generally through Real Estate agents), as well as bulk selling activity by banks and government sponsored organizations, there are signs of secondary markets developing for portfolios of rental homes. We may also see mergers and acquisitions among the active firms as they attempt to grow and achieve economies of scale. I'm watching the development for both investment reasons as well as for its effect on the recovery from the Global Financial Crisis.

Another potential benefit of these firms is from increased hiring and spending on construction of homes to get them in shape for renting (SBY estimates they spend 15% of the purchase price on homes they renovate before leasing). Two groups that appear to be well positions to take advantage of the growing asset class are those that aggregate small portfolios of rental homes to sell to institutional investors, and property managers of single family rentals.

Over a year ago Warren Buffett said "I'd Buy Up 'A Couple Hundred Thousand' Single-Family Homes If I Could." Since then a long list of prominent investors have moved into the space in addition to the countless "mom and pop" investors following the same strategy. I suspect a lot of people are underestimating the size of the potential demand for the asset class and I expect we'll see consolidation among portfolios with at least one of the public (or soon to be public) companies making a push to be the largest player. There are already several firms with over 10,000 homes and other firms targeting that number. I wouldn't be surprised to see a public firm eventually holding over 100,000 homes. Separate questions that remain include how much leverage the individual firms will use, and how much they will diversify geographically.

I believe many investors gravitate toward real estate investments and I think this is a new asset class that both institutional investors and long-term yield oriented individual investors will increasingly be drawn to. The short-term oriented hedge funds and private equity firms that do get out (either due to taking quick profits or due to disappointment over actual versus projected returns) will in many cases end up selling to longer-term investors (a group that looks like it will grow dramatically in the next decade). As I theorized last year, I think we may eventually see publicly traded portfolios of single family rental homes in other countries as well, which would allow investors around the world to own securities of portfolios of homes in various countries (just as you can buy REITS of various other properties).

The debate over whether "wall street" or government played a larger role in causing the global financial crisis remains undecided. Among the experts I've surveyed, roughly the same number place primary responsibility on Wall Street as those that primarily blame the government (although most believe Wall Street and Government contributed, along with society in general). In a potentially ironic development there now appears to be a possibility that "wall street" (with some government origination) may be contributing to the recovery by creating this rental homes investment class. Arguably, this new class has helped the real estate market recover, given the economy (and the construction industry in particular) a boost, and may even potentially help to keep real estate prices more stable in the future.

Gary Karz, CFA
Host of InvestorHome
Founder, Proficient Investment Management, LLC

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