Wall Street Creates “New Industry” in Single Family Home Rentals

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The following was written by real estate investor and guest author Kathy Fettke.*

kathy_fettke_headshot.jpegNow that foreclosures are at all-time lows, will Wall Street hedge funds exit the single family home rental market and move on to other investments?
 
The answer was a resounding, “No,” at Information Management Network’s (IMN) 4th Annual Single Family Investment Forum in Miami, Florida, this past May. 
 
The largest hedge funds, along with midsize and small funds, met to discuss the state of the rental housing industry - and the general consensus was that this is actually the beginning of an industry.
 
I had the honor of speaking on two of the panels and interviewing many of the speakers during my podcast, The Real Wealth Show. Here are some of the highlights:
 
The opening keynote was given by John Bartling, the CEO of Invitation Homes. He explained that in prior decades, large institutional funds invested in apartments. Today, the rental demand is weighted more heavily on the side of single family homes.
 
  • Invitation Homes, also known as Blackstone, is still privately owned, and boasts the second largest portfolio of rental homes with 47,572.
  • American Homes 4 Rent became the largest fund last December when they merged with American Residential Properties, Inc. The company is publicly traded and currently owns 47,655 homes.
  • The third-largest company is Colony Starwood Homes with 31,116 homes, also publicly traded. Progressive is in 4th place with 18,569 homes and is still a privately held company.
  • The top 18 Institutional funds today own approximately 198,748 homes collectively, but the four largest funds own 144,913 or over 73 percent. Most of the remaining 14 largest funds own fewer than 3,000 homes each.
While there’s been a lot of concern that these big Wall Street firms are buying up Main Street, the truth is that they only take up 1.13 percent of the 17.6 million single family rentals that exist today.
 
The average investors still rule the single-family home business, with 8 million families owning at least one rental property. Plus, the institutional funds are very specific as to the parameters of what they buy. Individual investors can usually find much better deals with higher cash flow and more equity.
 
The opening panel at the conference was focused on the economy in regards to housing.
Here’s a summary of the discussion:
  • Gross Domestic Product (GDP) is trending down, with the energy sector of course taking a major hit and contributing to lower growth.
  • Unemployment appears to be under control at 5 percent, but this figure does not include underemployment (part time workers and those who gave up). The labor participation is at a 40 year low; therefore some say unemployment is closer to 11 percent.
  • Wages are lower than they were eight years ago for the middle class, leaving workers who would like to buy a home unable to qualify for a loan. Income is not keeping up with home price gains, plus debt is increasing. But they have to live somewhere… so they are forced to rent and they seem to prefer renting a single family home over an apartment.
  • There’s a lot of talk about the Millennials impact on the economy and housing, as they are now the largest generation in the US. These young adults, ages 18-34, are trying to save for a down payment but they’re also waiting until more financially secure before they buy a home. They saw what happened to their parents during the housing crisis, and are not so quick to act. After all, they are the first generation since the Great Depression to see a major housing crisis.  They came of age during the Great Recession, choosing to stay longer in college since it was tough to find employment. Even with a college degree many are only finding low paying jobs. That, combined with high student loan debt makes it nearly impossible to qualify for a loan.
  • The average age for buying a first home is 31. The peak Millennial age is currently 24, suggesting this group will likely be renting for at least seven years, if not longer.  This age group is also known to love their pets and prefer single family homes over apartments where they can have a yard. Will hedge funds exit the industry once Millennials start buying homes? It’s not likely.
  • More than 10 percent of the housing stock went to rentals even before this housing crisis, and our population is growing. Plus surprisingly, Baby Boomers are the fastest growing segment of renters!
  • Why are rents and home prices increasing so rapidly?  Builders basically stopped building for about six years as they couldn’t compete with foreclosure prices. Now housing inventory is at all-time lows in most markets. New home sales are flat, around 500,000 - 600,000, which is about 1 million less than what’s needed based on demand and household formation. Builders are not taking big bets since most got wiped out in the housing crash. Today, they are focusing on smaller subdivisions at higher price points. Affordable housing is in great need, yet not being built.  
  • With low inventory and high demand, the national vacancy rate was at 6.7 percent in Q2 of 2016, according to the U.S. Census Bureau News, but lower in the top markets.
In summary, the top hedge funds said they do not plan to exit, but rather see this as just the beginning of an industry. 
 
Over the past five years, institutional funds have come to understand the single family rental business and continue to improve upon it. Today we have access to new data, national services, and software that simply didn’t exist before.
 
These funds also love the asset protection, cash flow, potential capital growth, leverage, tax benefits, and easy exit. They now see what the average investors have known for years. In fact, most of the funds announced they were actively buying in secondary and tertiary markets now that cash flows have compressed in the primary markets.
 
Should we be worried the institutional funds will knock out the little investor? Not at all! Remember, institutional funds make up less than 2 percent of the industry. Remember, as self-directed investors, we have more flexibility. Their parameters for purchasing are very narrow and specific, and only represent a small percentage of what’s available for sale.  But their contribution to our industry has and will continue to improve, systems for everyone.
 
About Kathy Fettke:
 
Kathy Fettke is the CEO and Co-Founder of Real Wealth Network, a California based real estate investment group with over 16,000 members. Kathy is passionate about helping people create real wealth — which she defines as having both the freedom and the money to live life on your own terms. She specializes in helping people create passive monthly cash flow by investing in income-producing assets like real estate.

Kathy is an active real estate investor herself, with properties ranging from single family rental homes, apartments, commercial buildings, and large land development projects. She is a licensed real estate agent and former mortgage broker, which has helped her understand and teach the power of leverage.
She is a frequent guest expert on CNN, BNN, CNBC, Fox News, NPR, CBS MarketWatch and The Wall Street Journal. She also hosts The Real Wealth Show which is a featured podcast on iTunes and Stitcher with listeners in 27 different countries.
 

*Kathy Fettke and Real Wealth Network are not affiliated with Equity Trust Company or its affiliates.  The information provided in this article is for educational purposes only and should not be construed as tax, legal, or investment advice.  Whenever making an investment decision, please consult with legal, tax, and financial professionals.