Invest With the Big Players

I just read an article over at the Wall Street Journal titled Big Landlords to Merge, Betting on Rising Rents.

Starwood Waypoint Residential Trust will merge with Colony American Homes, Inc. According to the article, combined they will own approximately 30,000 homes worth about $8 billion. Just doing a quick division, that’s around $267,000 each rounded up a little.

Actually, I would have thought it would have been a little lower average value. I’m sure it was when they were purchased, most probably in foreclosure, and then refurbished. Plus, home values have been rising as well. The goal of these companies was to try and concentrate holdings area-wise as much as possible to get some economy of scale in management and other costs.

These companies are betting that rental demand will remain high because it’s still impossible or tough for a majority of Americans to buy a home. Between high debt and higher down payment requirements, there are a whole lot of would-be buyers who will continue to rent for a while. Then there’s the threat of rising interest rates, which would make it even harder for buyers.

Blackstone Group got a lot of the media coverage in this bulk rental property buying spree, spending around $10 billion to acquire more than 50,000 properties. Stock market investors haven’t been overly excited about buying into these companies. A few articles over the past couple of years have outlined some problems with reaching occupancy and low turnover goals. Management was cited as a problem, as it’s a new thing to try and manage that many properties in a portfolio and spread out in area.

The U.S. homeownership rate is at it’s lowest in five decades, and rental properties now comprise around 13 percent of housing stock. That’s up from 5 percent in 2005. Small investors have been in the thick of the buying, and they’re for the most part enjoying excellent cash flow and low vacancy rates.

I believe that smaller investors will always have one edge, a closer relationship with tenants who will value their management more than tenants of these mega-companies. Sure, they have tons of money to invest, some selling bond issues to raise even more. But, the small investor or smaller groups should be able to maintain more control of management and property care issues, though they will not be able to negotiate costs like the big players.

The good news is that no matter how much we hear about real estate market improvements and price appreciation, it’s not really due to a major return of buyers. Much of it is fueled by investors, and the rest is really not overly exciting. The fact is that these companies are betting on a continuation of higher rental demand and increasing rents.

Another advantage I think small investors enjoy is that they can be more choosey as to neighborhoods. This can allow them to scoop up a home in an area not saturated with rental homes. The big companies have tried to concentrate their purchases for economy of scale. But, the small investor can get higher rent for a home surrounded by owner-occupied homes than one in the middle of a gigantic rental dominated area.

If you are a real estate investor or thinking of being one, it looks like following the big money may be a good decision.

Originally posted on The Huffington Post.