Corporations scoop up rental homes

08/19/2014

Corporations scoop up rental homes

ROCHESTER, N.Y. – July 31, 2014 – Apartment living brought Bill and Jennifer Schumacher together, with the two neighbors meeting while living at the same apartment complex in the Philadelphia area.

When Jennifer received a job offer in the Rochester, N.Y., area, the couple were fine with moving, but they didn't have much time, and they knew they didn't want to live in another apartment.

"We said, 'There's no way we're going into another apartment' – we need bigger space; we wanted some ground outside," Jennifer said while in the living room of the 1,900-square-foot Pittsford, N.Y., house they now rent. "This is a perfect opportunity."

Real estate company Broadstone Real Estate, based in Rochester, traditionally has focused on commercial properties, ranging from medical offices to retail space but is increasingly diving into the single-family home market, including through the Broadtree Homes line.

Earlier this month, it announced under its Broadtree Homes shingle that it had purchased 127 single-family homes in the Atlanta area for roughly $10 million. That purchase more than doubled the portfolio of single-family homes it began amassing in late 2012 around Minneapolis, Palm Beach County, Fla., and the Rochester area.

Big money has in the past been relatively rare in the rental house market. According to an analysis earlier this year on the single-family rental market by New York investment banking firm Keefe, Bruyette & Woods, about half of the nation's 14 million rental homes are owned by individuals who own just one rental property. Only about 2 million are owned by investors with 10 or more properties.

Renting single-family homes "has always been a mom-and-pop business," said Broadstone CEO Amy Tait.

However, the number of big real estate companies involved in renting single-family residences is growing. New York-based financial services giant Blackstone Group is now the largest landlord of single-family homes, having spent roughly $8 billion over the last two years buying 43,000 homes. California-based American Homes 4 Rent, the second largest such firm, started in 2012 and now owns more than 25,000 homes in 22 states.

"The financing for investor-owned properties has not been widely available, (and) the investment and lending opportunities are immense and perhaps just beginning," Keefe, Bruyette & Woods said in the analysis.

Plummeting home prices in recent years opened the door to the investment opportunity, said Dave Bragg, managing director of the residential research team at Green Street Advisors, a real estate research firm. Meanwhile, the armies of homeowners who saw their residences foreclosed upon still needed housing. "If you're living in a 1,500-square-foot house, you probably picked that for a need for space," Bragg said. "Foreclosure victims … didn't really shift into apartments."

Owning your own home was long synonymous with the American dream. But homeownership rates are waning nationally. According to U.S. Census Bureau data, the percentage of Americans who own their own home was roughly 65 percent in the first quarter of this year, the lowest it's been since 1995. The rate peaked in 2006, when 69 percent of Americans owned their own home.

"It used to be people thought renting was synonymous with going into an apartment community," Tait said.

But the financial crisis meant more renters as people lost their homes, plus a glut of foreclosed homes that came onto the market, she said. That, coupled with the fact of technology making it easier than ever to research homes for sale and to manage a portfolio of rental homes, opened the door to big investors looking at big portfolios of homes as an opportunity, she said.

"Until the crisis, it really didn't make sense for investors to do this," Tait said. "It's a management-intensive business."

In a conference call with Wall Street analysts in May, David Miller, CEO of Minnesota real estate investment trust (REIT) Silver Bay Realty Trust, said the shrinking supply of single-family homes for sale, as well as increasing home-building costs "point to continuing positive trends for future (price growth) and rental demand, all factors which bode well for … the demand for single-family rental homes."

Since its start in 2012, Silver Bay has purchased, and now owns and rents, about 5,700 single-family homes in eight states.

However, some worry those deep-pocket buyers are pricing individuals out of the housing market. In March, a group of 80 organizations – from Neighborhood Housing Services of Greater Cleveland to The Fair Housing Council of San Diego – wrote an array of federal regulatory agencies, asking for rules or guidance regarding the big investments going on in rental properties. They cited concerns ranging from displacement of homeowners to "the creation of another housing bubble."

That same month, U.S. Rep. Mark Takano, D-Calif., sent letters to the U.S. Treasury Department, Securities and Exchange Commission, Department of Housing and Urban Development, and the Consumer Financial Protection Bureau with numerous questions about the single-family rental market and the growth of bonds backed by the rental incomes from those properties.

According to the letters, despite low interest rates and purchase prices, families in Southern California and first-time homebuyers "are finding it hard to purchase a home. It is increasingly the case that these homes are being purchased by investment companies looking to rent out the property, leaving the family purchaser of modest means shut out of the market. Similar stories are coming out of Florida, Arizona, Nevada and Georgia."

"This is a new area that's potentially going to grow bigger," Takano said last week. "We have an obligation to try to understand it better – the financial instruments, the impact on communities, the impact on individual tenants. I'm not wholly comfortable with what I see going on – aspiring middle-class people being priced out of homes, out of a chance to get an equity stake in property ownership, and what I also see as neighborhoods potentially destabilized while Wall Street extracts their cut before they … flip and sell these homes."

However, the pace of big firms buying houses has slowed in recent months as housing prices have climbed around the nation, Bragg said. Now those firms are more focused on consolidation and buying portfolios of homes from each other.

After dipping its toe in the market with the purchase of roughly 100 homes since late 2012, Broadtree Homes has "learned enough to begin to ramp it up," Tait said.

In addition to the Atlanta homes purchased earlier this month, Broadtree has 50 more homes under contract in Atlanta. And Broadtree is looking at other portfolios of homes that had been previously snapped up by real estate companies now looking to sell. Tait said Broadtree has been offered well in excess of $1 billion worth of various portfolios as it looks to get more heavily into the market.

"There are lots of portfolios out there for sale," Tait said. "It's hard to do this efficiently without a couple hundred, 300 homes in a given market."

Eventually, the Schumachers plan to buy their own home. But for now, each of their two boys has his own bedroom. Their two dogs get to enjoy a fenced-in backyard. They live on the type of quiet suburban street where everyone's so friendly that neighbors brought the family house-warming gifts upon moving in last December.

There's only one drawback to the house, Bill Schumacher said: "The fact we don't own it."

Copyright © 2014 USA TODAY, Matthew Daneman. Daneman also reports for the Rochester (N.Y.) Democrat & Chronicle.

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