Here is a good article from
Bloomberg on private equity investors buying foreclosed homes as rental properties. The properties should generate good cash flow to sustain investors until the properties are sold. I'm not sure I buy this thesis:
In starting Waypoint, Wiel and Brien set out to show
institutional investors that by using technology they could
amass single-family homes the same way Sam Zell’s Equity Group
Investments Inc. (EQR) and other real-estate giants gather apartment
units in cities from New York to San Francisco.
The home rental market boasts a total property value of $3
trillion, according to Morgan Stanley (MS) housing analyst Oliver Chang. Yet institutions have long shunned it as too scattered
and impractical to be profitable.
Wiel and Brien are using cloud computing, proprietary
algorithms and iPads to create a virtual assembly line for
buying, renovating and renting houses on a large scale. They’re
also betting that many former homeowners who have jobs but
couldn’t afford their mortgages will still want to live in the
same communities as renters.
“The economics never made sense for a big investor to come
into the market, and the technology for managing all that
complexity didn’t previously exist,” says Brien, who still
possesses the steely stare of a field goal kicker. “The
confluence of those two events has provided a window of
opportunity for large investors to enter this space.”
The article mentions that Waypoint has over 1,100 homes. The exit strategy is still selling the homes individually, which will take months, and likely years. This will test the institutions' patience. Institutional money is great, but local knowledge is critical.
3 comments:
Cloud computing, proprietary algorithms, and iPads will not change the fundamental economics of renting single family homes. 1) A single family home tends to have a higher cost per square foot than an attached rental unit, while the rental revenue is usually about the same on a per square foot basis. 2) Dispersion of the properties prevents economies of scale from being realized, driving operating and management costs higher, on a per square foot basis. It comes down to buying at attractive cap rates, keeping the units rented, and increasing value by raising rents and selling to motivated buyers at a reduced cap rate. Much more management intensive than multi-family properties.
These programs are not going to sell on exit cap rates. The exit will be based on comparable sales, as the homes will be sold to an owner occupant, not another institution. I have seen investor acquisitions at discounts of 20% or more to a price a homeowner would pay in the same market, and all-cash buyers pay even a cheaper price.
The exit gets long due to marketing and listing of single homes. Buying on the court house steps is easy, but selling takes time.
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