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Friday, October 4,2013

Why Institutions are racing to buy single-family homes.




Large portfolios of REO homes and a strong residential rental market are attracting the attention of a new class of single-family home buyers—institutions. Private equity firms, mortgage REITs, and even a homebuilder have raised between $6 billion and $8 billion to acquire portfolios of foreclosed homes and rent them to consumers. Although it’s too early to know how investment in the asset class will evolve, institutional buyers seem to be following one of three business models. Long-term holders will rent the properties for up to 10 years, creating opportunities for local management companies, and then sell when prices have appreciated. Another approach calls for pruning out weaker properties from acquired portfolios and then improving the remaining homes for rental and eventual sale. Under a third option, investors could choose to sell off inventories rapidly, probably online, with profits coming from the difference between bulk buy discounts and individual retail sales. Another question is how these investments will be financed over the long term. Current buys are mostly for cash, but leverage could increase returns from an estimated 5 to 7 percent to 15 to 20 percent, because single-family rental companies are limited on the number of mortgages they can get on individual properties.

Securitization is among the best alternative for financing. Moody’s has already outlined guidelines for how such securities could be rated. Another financing option: Fannie Mae and Freddie Mac, which last summer launched a pilot program to liquidate 2,500 properties to institutional investors. Is the institutional ownership of single-family rentals a permanent change in the residential landscape? Almost certainly, Private equity will move on, but when you see the creation of public companies that own single-family homes, the asset class could be here to stay.


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