Are the big companies who have purchased large number of
single-family homes over the last few years looking for a quick profit or are
they in the buy-to-rent business for the long haul? Freddie Mac, in its latest issue of Insight Outlook says there are going indications it
might be the latter.
Landlording single family detached houses is generally
assumed to be a sideline. A 1996 survey
found that three quarters of such dwelling units were held by individuals or
partnerships which owned fewer than 10 units and others have estimated that
about half are the only rentals held by their owners.
Single family units have not traditionally made up much of the
market anyway, accounting for about 10 million rental units during the housing
boom. With the recession however the numbers climbed rapidly to 14 million,
about 35 percent of the market, in 2013. This came about through millions of
foreclosures, tight credit which left many unable to purchase a home, and
relocations for employment in a market not conducive to selling houses.
Freddie Mac says that a new single family rental model began
to appear in 2012 when a few large investors, backed by private equity, started
accumulating portfolios of single-family homes with the intention of renting
and managing them. The business model of
these buy to rent (B2R) firms was different than that of those that manage
large apartment complexes. Intuitively
big complexes should be more cost efficient to manage and maintain than
scattered site properties. They can be
loaded with standardized systems and appliances making maintenance and repairs
more efficient. The costs of non-living areas such as landscaping can be spread
across multiple units. Staff and
equipment can be located on site.
Obviously these advantages don’t pertain to single-family houses.
The collapse of home prices is one explanation for the
emergence of B2R companies. Buying
cheaply offsets some of the higher maintenance and management costs while the
decline in homeownership generated new demand for all rentals and for single
family rentals for those not attracted by apartment living.
But if the collapse of prices was the sole motivation the
article says, buying to rent should be a temporary phenomenon. Alternatively, if there is a permanent
cultural shift from home ownership to renting, particularly for families, and
these new companies have learned to manage networks of single family homes
efficiently then large scale B2R may be here to stay.
Freddie Mac cites a recent study by James Mills, Raven S.
Molloy, and Rebecca E. Zarutskie that looked at the business models of the
eight largest B2R firms, tracking their property purchases from 2012 to
2014. The study focused exclusively on
detached home sales and divided the purchasers into groups; individuals and
corporate investors broken into groups by the number of homes purchased per
year, including a category for the eight large B2R firms.
The study found that B2R remains a small part of the
single-family market. Those eight companies
purchased $16 billion properties over the three years and never exceeded a 2
percent market share in any year.
The firms, as might be expected, did buy distressed
properties but each year non-distressed properties formed a larger share of
purchases – from around a third in 2012 to about half in 2013 and each year
they purchased a higher share of non-distressed properties than other large
investors. They also purchased a
relatively smaller share of lender-owned properties (as opposed to foreclosures
and short sales) which tend to be in poorer condition, than did other
investors. They spent more on repairs
and renovations, an average of 20 percent of the purchase price of each unit
while purchasing homes that tended to be newer, larger, and on smaller lots
than those purchased by other large investors.
Such homes should have less need for renovation and repairs, yard
maintenance is reduced, and the larger size suggests a decision to concentrate
on family tenants – all indicative of a longer term strategy.
The B2R firms concentrated purchases in a few metro areas,
particularly in the Southeast and even constituted a major market in some; for example
accounting for 12 percent of single-family purchase in Atlanta in 2013. They also tended to purchase homes that were
more tightly clustered within a metro area than did other investors. The reason for this is not clear – do clusters
promote easier management of long-term acquisitions or represent a
concentration in price depressed areas with a greater change of larger and quicker
The chart below shows on the left the house price decline
from the national peak to the average time homes were purchased and the right
panel compares house price recovery from that purchase point to the middle of
2015. While those areas with significant
B2R investment in 2012 did show higher appreciation than the national average
(44 percent v. 24 percent) that difference narrowed significantly for purchases
over the next two years.
Freddie Mac concludes that the emergencies of large-scale
B2R firms potentially represents a new feature of the single-family rental
market sector. “While the data is mixed,
there are some signs that large-scale firms intend to manage their large
portfolios of single-family rentals as an on-going business.”