REITs Eye Bigger Piece Of Single-Family Home Rentals

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 (NYSE:AMH), a REIT that specializes in single-family rentals, bought Beazer Homes‘ (NYSE: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 (NYSE:BX). It has invested more than $8 billion in around 43,000 homes.

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