Wall Street Snaps Up Cheap Single-Family Rentals

For Invitation Homes Inc., the U.S. landlord built by Blackstone Group LP, the 220 houses it owned in working-class areas around Atlanta were outliers, filled primarily with low-income tenants paying rents well below those at its other properties.

For another company with big private equity ties, the homes were an opportunity.

Promise Homes Co., a firm started last year with $130 million from investors including Ares Management co-founders Tony Ressler and Michael Arougheti, purchased the houses from Invitation Homes for $22 million in August. The startup set about a strategy built around helping tenants improve their finances, aimed at keeping them in their rentals and minimizing costly turnovers.

As Wall Street’s rental-home industry matures from its early days of frenzied homebuying after the foreclosure crisis, upstarts such as Promise are turning to cheaper houses that have largely been cast aside by big, established landlords. With easy real estate bargains gone, investors are focusing on homes that carry higher yields and potentially more risks — as well as an opportunity to promote a mission of helping poorer renters.

“Larger companies are getting rid of underperforming assets,” said Jade Rahmani, a managing director at Keefe, Bruyette & Woods Inc. “That’s leaving an opening for companies to move more downstream, companies targeted to the affordable market, to lower-income residents — because there still could be an opportunity to earn a return.”

When Wall Street companies started buying homes en masse in 2012, they mostly avoided focusing on properties aimed at poorer tenants, who tend to be less financially stable and more transient. Cheaper houses often require more expensive repairs, and even when they don’t, landlords can get hung up on basic math: A new roof or refrigerator costs the same amount whether you rent the house for $1,000 or $2,000, but it takes longer to recoup the cost of repairs if you’re collecting lower monthly payments.

Single-Family Sprawl

Houses accounted for 35% of all U.S. rentals in 2016, up from 31% in 2005

Source: National Association of Homebuilders tabulation of Census data

Those calculations are changing, however, as increased competition drives up home prices and compresses yields.

“There’s been interest in the lower-priced properties from individuals since we launched our platform,” said Gary Beasley, chief executive officer of Roofstock, an online platform for buying and selling single-family rentals. “More recently, we’ve had institutions looking at some of the lower-priced homes and getting excited about it.”

Cerberus Landlord

It’s not just new companies such as Promise entering the mix. Cerberus Capital Management LP, whose initial foray into single-family rentals consisted of making loans to landlords, is betting on working-class homes that generate lower rents than those owned by other large institutions.

The company’s FirstKey Homes unit acquired 8,000 single-family rental properties in the last six months of 2017, more than doubling its portfolio. The Marietta, Georgia-based landlord owns 14,000 homes spread across 24 markets and plans to triple its holdings, according to CEO Martin Esteverena.

FirstKey’s homes have average rents of about $1,300. By contrast, Invitation Homes, the largest U.S. single-family landlord, charged an average of about $1,700 in the third quarter.

Other investors are focusing in geographical areas that were largely avoided by early large-scale buyers. Tawan Davis, a Goldman Sachs Group Inc. alum, is focusing on East Coast U.S. cities sometimes seen as more complex — and costly — to operate in. His company, Steinbridge Group LLC, has acquired about 60 Philadelphia row houses that typically rent for $700 to $1,200, and it plans to eventually invest $425 million across areas such as Baltimore and Northern New Jersey.

The idea is to offer quality, affordable housing that lets families stay in gentrifying neighborhoods, Davis said.

“Our goal is to be a long-term presence in these neighborhoods, not to be a part of the problem,” he said.

Source: bloomberg.com