In a recent article in Bloomberg, John Gittelsohn describes the increased activity by Private equity firms and REIT’s to jump into the distressed housing market with Fannie Mae’s assistance. Apparently, these equity firms and REIT’s believe they can take advantage of a depressed housing market and become large scale single family landlords.
On the surface, this may sound like a great idea to reduce the number of vacant foreclosed homes. But, in reality, it’s just another half baked idea to try and reduce the current inventory of foreclosed homes.
Don’t get me wrong, single family homes are a great investment. Renters tend to stay longer, and returns are currently better than the stock market. Single family homes are a great local investment. But unlike apartments that REIT’s have been investing in for years, houses do not offer the economies of scale of apartment investments. For instance, each municipality is different, and each home in that area is treated differently. Where a REIT may pay water and sewer charges to one utility for 300 units, 300 single family homes may be spread out over multiple water and sewer utilities. 150 apartments may use the same central boiler, but now you’ve got 150 different water heaters, 1 or 10 buildings with roofs versus 300 roofs, the list goes on and on.
Another proposal is to leave the current owner in place and let them become rentors? That would leave the owner who can’t make the mortgage payment as the tenant. Typically this is the same owner who has deferred maintenance on the property because they lack cash. Let’s see if I understand this: this private equity fund or REIT is going to buy the home(s), discount the rent to keep the current owner in the property, and take care of the previous owners deferred maintenance, in multiple locations with multiple physical systems. Really?
And when the REIT or private equity firm is tired of this investment, who is going to be the buyer of these homes? Are they going to sell them one at a time to owner occupants? Flip them to another private equity firm? Break them up in smaller packages for local investors? The word discount brings out the investors. But be cautious if you are looking to invest in one of these private equity funds or REIT’s.
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