Any residential property qualifies if it can generate cash flow that justifies the market price, he says, which is why this new asset class poses unique risks and potential obstacles Morningstar is already addressing in its single-family rental security rating.
Investor appetite for single-family securities is growing bringing to the market new issuers who will expand and diversify securitization structures creating potential new risks all investors need to be aware of, he notes in a recent report.
Grows list of investor risks to watch out for includes the fact that a multitude of managers works with a multitude of borrowers.
Owners of large inventories have to hire third-party service providers or property managers, and by doing so they face additional risks including anything from property maintenance quality to data reporting.
Smaller-size single-family asset owners who manage these properties in-house have another problem. They own inventories that are not large enough to justify the issuance of a single-borrower securitization, he explains, potentially forcing them to pool together properties owned by smaller investors/property managers into a single securitization trust.
The latter also poses benefits and risks to investors.
Benefits to having a more diverse set of borrowers illustrate that old saying of not having all eggs in one basket, and also greater local market knowledge and hands-on tenant management.
While examples of unique risks to this type of single-family rental security structure include a need to establish water tight cash management oversight and mechanics to avoid leakage of cash.
In addition, the high likelihood of post-securitization changes in property management require well-planned, ahead-of-time transitions, or the use of a backup property manager that could help mitigate some of the risk, he says.
Property management reviews are yet another potentially costly and complicated process that can be mitigated by implementing new forms.