Seeking Alpha

Single-family rental business model in question

  • "Arguably when you get scale, you can hire your own plumbers and electricians, and maybe help costs go a little lower that way," says Richard Green, director of the USC Lusk Center for Real Estate. "But it's still a mystery to me how they can manage the properties efficiently enough and get the right yields."
  • Or as Auction.com's Rick Sharga puts it: "It's hard enough to manage a 30-unit building, but it's incrementally more difficult to manage properties that are scattered all over the place."
  • Given the management challenges, another way to earn a decent return would be to boost rents, but home prices are rising faster than rents at the moment, making that avenue questionable.
  • Noted players: ARPI, SWAY, AMH, SBY, RESI.
Comments (14)
  • wigit5
    , contributor
    Comments (4183) | Send Message
     
    rent to own is coming imo...
    10 Jul 2014, 03:09 PM Reply Like
  • SivBum
    , contributor
    Comments (1876) | Send Message
     
    They call it lease options to buy ... been around since the 60's and 70's. During hard times in housing, as the 17% mortgage rates in 1980's or crushed home prices in 2008 to 2009, that is a win-win strategy for buyers/sellers.
    10 Jul 2014, 03:21 PM Reply Like
  • wyostocks
    , contributor
    Comments (8663) | Send Message
     
    Simple answer folks.
    This is just another in a long line of Ponzi schemes.
    10 Jul 2014, 03:13 PM Reply Like
  • SivBum
    , contributor
    Comments (1876) | Send Message
     
    It is simply a business. The managers must charge the owners based on higher expenses and the owners set the rent for acceptable cash flow.

     

    Scenario is a home owner pay someone 8% annually pluses maintenance costs to interface with renters, be it one home or 20 homes around town. It's only business.
    10 Jul 2014, 03:25 PM Reply Like
  • Tobias Schmitz
    , contributor
    Comments (438) | Send Message
     
    You can increase yield by decreasing maintenance spending to as close to zero as you can get away with.
    10 Jul 2014, 03:22 PM Reply Like
  • SivBum
    , contributor
    Comments (1876) | Send Message
     
    Yes, short term and if the home is less than a few years old. When something went wrong, like frozen/broken pipes, clogged drains, plugged gutters, malfunction appliances etc, you better fix them fast or risk the home getting damaged by those something wrongs. That's way you would be lucky to get a 70% loan to value from the banks ... and hope for a good tenant.
    10 Jul 2014, 04:09 PM Reply Like
  • Tobias Schmitz
    , contributor
    Comments (438) | Send Message
     
    Short term is king these days. And for companies "the house" is the value of the house and that is a number on a piece of paper somewhere. As long as that number does not change the house does not change. In plain English you let the homes deteriorate, but carry them at at full value in the paperwork.
    When things get too bad you sell to a sucker.
    10 Jul 2014, 05:31 PM Reply Like
  • kmi
    , contributor
    Comments (4211) | Send Message
     
    The model didn't make sense from the start. And most of the early investors who built up the product have already securitized the 'revenue stream' and otherwise exited already, leaving the small fish to fry.
    10 Jul 2014, 04:08 PM Reply Like
  • IWCOTTON
    , contributor
    Comments (61) | Send Message
     
    If home prices keep rising, then they should be able to cash out in a few years. Reminds me of some time ago when Hertz reported greater earnings from the sale of depreciated cars than from rentals. Made everyone recognize that the rental business only had to break even or take a small loss to enable the used car business to flourish.
    10 Jul 2014, 04:44 PM Reply Like
  • Abercrombie
    , contributor
    Comments (28) | Send Message
     
    The notion that home price appreciation (HPA) will save this things is a myth. Yes, the private equity shops, like Blackstone, were early and smart; by issuing very cheap debt they largely cashed out and are playing with the house's chips.

     

    But, for the vehicles that are trading publicly and will limit themselves to, say, 50% loan-to-value debt, not so much. They are too equity intensive and, most importantly, THEY WILL NEVER SELL to realize that illusory HPA. The managers of these companies are in the assets under management (AUM) business, and they generally get compensated for growing AUM, not from selling themselves out of a job by liquidating the homes. Unlike a private equity firm, which typically has an IRR lookback and is incented to buy low and sell high, the public companies are incented to grow AUM and never sell. So the equity shareholders will earn a mediocre dividend yield (at some point in the future) while clinging to the illusion that their stocks are "cheap" because there is all this imbedded HPA. But like the kid with his nose pressed to the bakery window, the cookie will remain out of reach.
    13 Jul 2014, 11:41 AM Reply Like
  • WallStreetDebunker
    , contributor
    Comments (2741) | Send Message
     
    In the current anemic economy, the corporate single-family home landlords should buy a fleet of mothballed ice cream trucks from the 1970s and turn them into roaming handyman vehicles stocked with spare keys, plumbing snakes, and toilet floats. Then they can hire a bunch of unemployed college graduates at $15/hour and have them drive the trucks around town every day (after a 15-minute training video like at McDonald's). Give them a baseball cap and a wifebeater t-shirt with corporate logo patches, and they're good to go.
    10 Jul 2014, 04:45 PM Reply Like
  • SivBum
    , contributor
    Comments (1876) | Send Message
     
    WSD,

     

    No need. Those MBAs already got it figured out. Besides the subcontractors under Home Depot or Sears, I am seeing many independently owned sewer trucks, carpet cleaners, law services, concrete sub, house painters, roofers, garage door repair, waater tank replacements ... paying some central dispatcher to tap into home repairs for landlords large and small. They are charging cheap flat rates unless something serious.
    11 Jul 2014, 08:54 AM Reply Like
  • Badgold
    , contributor
    Comments (149) | Send Message
     
    Will eat you alive in fees and expenses paid to related parties. It's about making money for the managers.
    10 Jul 2014, 07:38 PM Reply Like
  • mattmarps
    , contributor
    Comment (1) | Send Message
     
    I have a large property management firm and have tried to show several large portfolio managers the enormous benefits of using established local firms to manage these properties at a fraction of what they pay in staffing these large corporate teams to inefficiently manage these properties from hundreds or thousands of miles away with no oversight on the ground, no access to decades of relationships and cheep rates firms like mine have with our vendors we give hundreds of jobs to each year and NO method of keeping the tenants happy and wanting to renew each year therefore lowering vacancy gaps and one of the real hits to their income!! Cheaper management costs, cheaper repair expense costs and better local oversight & happier tenants equating to huge increases in net income!! I wish these guys would wake up!!
    11 Jul 2014, 07:25 AM Reply Like
DJIA (DIA) S&P 500 (SPY)
ETF Hub
ETF Screener: Search and filter by asset class, strategy, theme, performance, yield, and much more
ETF Performance: View ETF performance across key asset classes and investing themes
ETF Investing Guide: Learn how to build and manage a well-diversified, low cost ETF portfolio
ETF Selector: An explanation of how to select and use ETFs