Although the single-family rental market may have the reputation of being a logistical problem for property managers, some experts believe it is a sustainable business model.
Richard Caterina says there always has been the possibility of building a strong business with single-family rentals, but it's too soon to say whether it's a long-term model. Caterina, senior vice president of Irvine, Calif.-based Johnson Capital, says the foreclosure crisis caught the attention of institutional investors and created “widespread aggregation," especially in tertiary markets.
“Sustainability for this investment class is currently unclear as eventually all investors will have to determine if they will hold the asset for the current yield, trade in bulk to another investor, or liquidate the portfolio one house at a time," he says. " It will be exciting to see how this investment class will continue to evolve.”
But there can be a social purpose to the single-family rental market as well. Nancy Welsh, CEO of Raleigh, N.C.-based Builders of Hope, believes single-family rentals are imperative to solving the affordable housing problem nationwide.
“Without utilizing the existing inventory of abandoned and vacant housing for rental, there is no other way to build enough units, fast enough, to meet the critical demand for affordable housing,” Welsh says.
New Paradigm, or Flavor of the Month?
New York City-based Colony American Homes has more than 15,000 single-family rental homes in nine states with a staff dedicated to buying and renovating more homes nationwide. Fred Tuomi, COO, says the single-family rental companies can take lessons from multifamily's history.
“Just as the institutional multifamily rental market opened up choice in housing 20 years ago—bringing long-term capital, professional management and transparency to the apartment rental business and proving a viable sector for investors seeking predictable income with asset appreciation—the same process is now occurring in the single-family rental space,” he says.
Tuomi also believes the economic climate over the last five years is driving the single-family rental demand while the rental market’s hot-spots are being defined by families choosing to rent homes in neighborhoods with services, schools and security, he says.
“In under two years' time, institutional purchases have begun to stabilize the country's single-family housing market, providing quality housing and professional local property management for families, and returns for investors,” Tuomi says. “Available capital for this model is being further increased through lending facilities geared toward smaller owners and securitization, and public offerings for larger industry consolidators.”
But JRK Property Holdings Company President Bobby Lee isn’t convinced.
Lee, who is also COO of the Los Angeles-based company, says buying pools of scattered assets in one market doesn’t set the stage for a sustainable business.
“It is terribly inefficient to lease and maintain these properties when compared to their multifamily counterparts,” he says.
He’s also concerned about how single-family rental companies will manage growth.
“The fundamentals that gave birth to the single family rental business are now turning the other way… home prices are beginning to rise, credit will loosen for entry-level homebuyers, and the economics justifying the entire trade continue to become less compelling,” he says. “It simply becomes too expensive to grow one’s portfolio when the economy is in recovery mode, much like investing in distressed debt. While existing owner/operators that have already amassed portfolios will benefit from their rising value, I expect to see a decline in the overall business as these operators eventually choose to exit through individual asset sales.”
Lindsay Machak is an Associate Editor for Multifamily Executive. Connect with her on Twitter @LMachak.