Single family real estate has been the investment of choice for many people for many years. The ability to create an annuity like stream of income with capital appreciation to boot has attracted many investors to this space.
For the individual who buys and rents houses, the economics are fair and the cash flow is real. I know many individuals who have made decent money holding 2, 5 and up to 20 properties. These numbers seem to be the sweet spot for returns as maintenance costs do not eat up your cash flow and/or your equity. But what of the institutional investors that have entered the game and need to have a larger scale in order to make a difference in their portfolio? I have discussed Two Harbors (TWO) entrance into the market, as well as Beazer Homes (BZH) entry into the market, and now we hear of Blackstone Group (BX) getting involved (Bloomberg):
Blackstone Group, the biggest buyer of U.S. commercial real estate since prices bottomed, is jumping into residential property as housing recovers. The private-equity firm has spent more than $250 million this year buying foreclosed single-family houses with the intention of renting them out, said two people with knowledge of the effort. The goal is to acquire enough assets to potentially take public as a real estate investment trust, or sell to another company or even to tenants, said the people, who asked not to be identified because the plans are private.
The New York-based company is the biggest investor seeking to enter the single-family leasing market as rents climb and the U.S. homeownership rate sits at a 15-year low, joining rivals including KKR & Co. (KKR) and Colony Capital LLC.
So far, Blackstone has acquired more than 1,500 houses around Phoenix and Southern California, the people said. It plans to buy in markets with the greatest supply of distressed properties, including Florida, Northern California and Georgia.
As I said earlier, however, the sweet spot seems to be from 5-20 houses as maintenance is manageable. In Beazer's case, the homes are in development sites, so maintenance, while still an issue, is more manageable. I cannot figure out how the economics will work when properties are spread throughout multiple states and multiple locations within each state. As the economics between renting and owning narrow and as the market sees larger new entrants, the margins should become narrower, increasing the event risk. Multifamily properties are easier to manage from this respect as their properties are communities and therefore tightly grouped units with common areas and far less ground to cover.
Bottom Line: While interesting and somewhat compelling, I cannot figure out the economics behind the investment. There are many saying that single family REITs will happen, but I have a hard time determining how it will work. For now, I see it as support for the housing market (especially in the hardest hit areas) but do not see a longer term investment potential in a single family residential fund or REIT.