While rising home prices have caused many institutional investors to ease back on investments in single-family rental homes this year, real estate investment trusts (REITs) have helped fill the gap by buying rental homes across the U.S.
The challenge now is converting these rental properties into winning investments.
That's not as easy today as a few years ago, when distressed properties and other homes could be bought at rock-bottom prices. Buyers had the dual benefit of watching their assets rise in value while also collecting rent money, analysts say.
With home prices climbing and fewer distressed properties available on the cheap, it's tougher for investors to earn the "juicy" yields they got during the darkest days of the housing crisis, says Lawrence Yun, chief economist at the National Association of Realtors.
"Higher prices make it harder to get the sufficient yield," Yun said. "There appears to be less enthusiasm among institutional investors than there was in prior years.
Portfolios Beef Up
In contrast, many REITs remain enthusiastic about the market for single-family rentals. Evidence of this enthusiasm came earlier this month, when American Homes 4 Rent (AMH), a REIT that specializes in single-family rentals, bought Beazer Homes' (BZH) Beazer Pre-Owned Rental Homes for about $263 million in debt and equity.
For American Homes 4 Rent, the deal added more than 1,300 homes in Arizona, California, Florida and Nevada. Those homes beefed up a portfolio that already included more than 25,000 homes in 22 states, making American Homes 4 Rent one of the nation's biggest landlords of single-family homes.
Its latest acquisition continued a trend that has seen REITs, private equity funds and other investment groups gobble up large quantities of single-family rental homes as a way of elbowing into a market that was traditionally ruled by smaller, local Mom & Pop outfits.
Most of the units being acquired are entry-level homes normally geared toward first-time buyers. As many would-be buyers can't get mortgage loans, they rent instead.
In a recent report, analyst Jade Rahmani of Keefe, Bruyette & Woods noted that over the past couple years "major institutional players" have invested about $20 billion of capital to acquire approximately 100,000 to 200,000 properties.
Meanwhile, he says, investors in aggregate — both small and large — have purchased nearly 2 million homes, the equivalent of about 20% of total home sales in the period.
Rahmani's data show that the biggest player in the market for single-family rentals is Invitation Homes, an affiliate of New York-based private equity firm Blackstone Group (BX). It has invested more than $8 billion in around 43,000 homes.
American Homes 4 Rent ranked No. 2, with $4.6 billion in more than 27,000 units. Other REITs in the top 10 include Altisource Residential (RESI), Starwood Waypoint Residential Trust (SWAY), American Residential Properties (ARPI) and Silver Bay Realty Trust (SBY).
Blackstone and other institutional investors have dialed back their rate of acquisitions in 2014, in part because the markets that they typically target have seen home prices rise sharply over the past year.
REITs are more apt to focus their buys in markets where prices have been stagnant and homes are still inexpensive, the NAR's Yun says.
While many institutional investors concentrated buys in markets such as California, Las Vegas, Phoenix and Florida, REITs are more likely to look at cities like Indianapolis, St. Louis and Memphis, "where prices have not yet risen," he said.
Now these REITs must figure out how to earn an adequate return on their investments in a housing market that has seen significant changes over the past year.
"Five years ago, the yields were so good, you could still make a lot of money even if your management costs were high," said Richard Green, director of the USC Lusk Center for Real Estate.
The yields aren't as good now, he says. That puts more pressure on REITs and other investment companies to boost yields through more efficient management.
For smaller local operations, management is not that difficult because people are nearby to handle property issues immediately.
It's a tougher job for large, national-scale companies that are headquartered hundreds or even thousands of miles away from the homes that they own.
"Arguably when you get scale, you can hire your own plumbers and electricians, and maybe help costs go a little lower that way," Green said. "But it's still a mystery to me how they can manage the properties efficiently enough and get the right yields under this business model.
One way to improve yields is to charge higher rents. That's happening in many markets. Still, rents have not been rising as fast as home prices, Yun says, so buyers of single-family rentals must find other ways to maintain sufficient yields.
It's The Upkeep
Rick Sharga, executive vice president at real estate marketplace Auction.com, says that many large investors "underestimated" the complexity of managing single-family units.
"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," he said.
With rental income and property management getting more important to yields of single-family rental homes, many investors have shifted their way of thinking, Sharga says. In the past, they may have eyed cheap, distressed properties that could be fixed up and rented out.
"Now they are paying a little more upfront for homes that don't require any repair outlays, and they have third-party property management already in place," he said.