When big money chases rentals – Fed pushing large money investors into becoming landlords.
Another interesting trend courtesy of the low interest rate environment created by the Federal Reserve is the feverish chase for yield. In a previous article we discussed that a large part of the higher rental prices were coming from a segment that had lost their homes via foreclosure. Since the housing bubble popped millions of Americans have lost their homes. As the report also found, many of those stayed within the same area but likely shifted to a single-family rental or an apartment. What we did not discuss however is how investors are playing a role in pushing up rental yields as well. As bigger blocks of large investors purchase distressed properties, many add value to the property and try to push rental prices upwards. I saw a presentation a few months ago of some local investors in Southern California purchasing older apartment buildings (some built in the 1970s) and upgrading them to more modern standards. Once the upgrades were complete, these investors pushed rents up by 7 to 10 percent. What impact is the flood of investors having on the market?
Shift from owning to renting
The drop in home ownership has largely come from the removal of two factors:
-1. The easy access toxic loans that provided leverage to anyone with a pulse
-2. The millions that have lost their home via foreclosure
Even with super low down payment loans like FHA insured products, many Americans simply cannot afford to purchase a home even in today’s low rate environment. Yet this low rate environment has had a big impact on rentals:
“BNP Paribas: – As investors seek returns, housing looks increasingly attractive. A lot of increased activity has come from cash buyers; the National Association of Realtors reports that the share of existing single-family home sales purchased by cash buyers has risen to just below 30% from 20% a few years ago. Private equity investors have also been reportedly buying blocks of homes for rental conversion.â€
This is major shift. 30 percent of recent single-family home sales went to cash buyers. Private equity is now having a big impact on this market. The chase for yield is largely driving these investors and rental yields are favorable in many markets. Many investors have looked at markets that have been forgotten and jump in, buy up places in blocks, and try to push rents up because of the perceived added value of their upgrades. It is an interesting process but once again the Federal Reserve is largely pushing big money into a market that is impacting most Americans. At a time when incomes are stagnant higher rents stretch budgets even further.
Monthly payment versus price
The massive drop in mortgage rates is largely a method to keep home values inflated. Do not doubt this for one second. Even the Fed came out directly stating that QE3 was largely going to be a MBS program. You do not get more specific than that. They have an open commitment that is likely to buy nearly half a trillion in MBS within a 12 month period.
The impact is enormous here. For example, let us run a $500,000 mortgage from 2000 at 8 percent and one today at 3.5 percent:
Principal and interest @ 8%:Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â $3,668
Principal and interest @ 3.5%Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â $2,245
To get the monthly PI similar to what it is today with an 8 percent mortgage would require that $500,000 mortgage to be at $300,000. Even with a low rate people will be paying this much over the life of the loan only with principal and interest:
$500,000 mortgage PI @ 3.5% over 30 years:Â Â Â Â Â Â $808,000
Add in taxes, insurance, and maintenance and you are inching closer to $1 million for a $500,000 mortgage. The focus on the monthly payment is really driving a large part of the housing market today. That is why FHA insured loans have come in to plug the low down payment market left by the toxic mortgage debacle.
Thanks to these low rates, big investors are likely also bidding home prices up competing with families simply looking to buy a home. More unintended consequences. It is a fascinating trend seeing so many investors actually jumping into the rental game. Big money however is fickle and as quickly as the trend ends, it will quickly evaporate.
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52 Responses to “When big money chases rentals – Fed pushing large money investors into becoming landlords.”
I have a better one for you.
$500,000 house at 8% in 2006 payment $3,668
same house now discounted to
$300,000 at 3.5% in 2012 payment $1,347
Yes, that is correct. The very same house is now $2,321 cheaper, or around 65%
less mortgage payment. This is using average loss in home values and lower interest
rates. How do you like those potatos? And, houses are still not selling and some big names predict more drop in prices. Obviously, this depends on local circumstances but it is happening. This gives one an idea of just how big a bubble real estate was and how totally screwed the economy is and why the Fed panicked.
Exactly… you can’t really just compare a $500K home at 8% and 3.5%.. you also have to take into account that a lot of homes dropped 40% from 2006.
I have friends that bought condos in 2006 for $500K+.. You can now buy the same condo for $250K-$300K at 3.5%….
The payment difference is staggering, that’s why people are buying.
And by the way, who cares if total cost of a $500K home is a million over 30 years… How much is your total rent cost over 30 years.. probably close to a million also and you have nothing to show for it.
The question is why buy now at all? House prices are still dropping in this “jobless recovery.” With 45 million on food stamps, rising food and gas prices, 50% of the veterans returning from war claiming disability, and so on…
I told my son to wait for another 20-30% drop before buying. Plus, renting lets the young folks be nimble and flexible to take a better high paying job anywhere. A person has to think long and hard before locking into a 30 loan in one location.
Read Patrick.net. The problem in the bay area is that renting is far cheaper than buying. If you can save the difference between the cheaper rent and the more expensive mortgage, you will have a lot to show at the end of thirty years.
Just closed escrow on a 550K place that was 850K in 2007. Had to lock in rate a couple weeks ago but we are at 3.75%. There is NO way I could of bought this place at bubble prices at a higher rate…I have no idea how that even happened! How did people afford that???
could HAVE
They didn’t! Teaser rates and negative amortization to anyone who had a pulse took prices to that level.
Now the “teaser rates” are the normal rate.
Candace, congratulations on your new home. What city is it in?
2006 rates were somewere around 4.5%-5.5%. keep in mind, options arms in 2006 were using a 1% neg am rate to sell those homes. Not the fully amortised,but fuax payment was about the same.
Equity investors becoming landlords!!! Bawhahaha, these guys have no idea which circle of hell they are about to enter!
Landlords have 3 things to consider before renting:
Will the rent be paid
Will the renter take care of the home
Will the house require refurbishment after the renter moves out.
These 3 things affect the investors return on their investment.
Imagine you are handing the keys of a $200,000 investment to
1. A reliable person: pay on time and keep the place clean;
2. An opportunist: knows how to work the system to get free rent
3. A scumbag: tends to lead the home in the condition of a pigsty
Can you guess what’s is going to happen to your investment?
Renters come in all types, here are a few that I have come across:
If these new investors get to full of themselves and raise rents, there is always rent control.
Bawhahaha, welcome aboard suckers!
That’s all true enough Russ, but we’re talking about big hedge fund /private equity types here. They have a pretty succesful businesss strategy, and it’s called “Screwing the rest of society with the help of Washington”.
I doubt those guys are going into this market without having figured out a way to get a variety of unfair advantages that the little people won’t get.
I’m with you Paul J. Example from my neck of the woods:
http://www.tampabay.com/news/business/realestate/blackstone-to-buy-1-billion-worth-of-tampa-bay-homes-for-rentals/1252624
Hi Paul and Michelle,
I read the article and did a little financial analysis.
So Blackrock said they buy 3 br and 2 bath homes between $100k to $175k in Tampa FL and expect 1% in rent. $100K = $1k monthly rent and $175k = $1750 monthly rent
Going to the Tampa county website the property tax will range between
100k home $1834-$2184
157k home $2588-$3045
Property manage fees 7%, got this from a property management website http://www.propertymanagementtampa.us/tampabay/
SO here are the numbers
$100k home
Income $12k per yr $12k per yr
PTax ave = $1835 $2184
PMgt 7% $840 $840
Net Income (ave) $9325 per year 8976 per year
RoR 9.35% 8.9%
$175k Home
Income $21k per yr $21k per yr
PTax ave $2588 $3045
PMgt 7% $1470 $1470
Net Income (ave) $16942 per year $16485
RoR 9.68% 9.42%
A 9.5% return, not bad, typical 3 months rent to service the basics.
btw FL has no cap on property taxes like California with its Prop 13
Miss a rent check or have some unexpected repairs or damage and its a subpar return. We also know the equity boys don’t like subpar returns.
Yes Good renters should be able to get a deal with their track record is they learn how to sell themselves.
Being a landlord is a tough business, I tried my hand at it about 20 years ago, did everything wrong, and all of your predictions came true. So I sold my properties and decided to lose money in the stock market instead.
A few years ago I picked up a couple of REO’s for an unbelievable price, fixed them up, and HIRED A PROFESSIONAL TO MANAGE THEM for me. What a difference this makes, I got good tenants, properly screened, and they stick around.
Here are a few ideas I would recommend for someone thinking about being a landlord:
1 Hire a professional to manage the property.
2 Don’t buy anything with a HOA
3 Buy something close to home, so you can keep an eye on the property.
4 Get a simple house and make it bulletproof, i.e. laminate floors and kitchen cabinets from Home Depot.
5 If you do have to pop over for a repair, tell the tenants that you are the handyman, not the owner.
6 Did I mention, get a professional to manage the property.
Re: telling the tenants you are the handyman. That’s kinda funny. My present landlord is doing that. He tells me he is the apartment manager, so if I make any request (once I wanted permission to install a satellite dish) he says he has to go take it to the owners and “we’ll see”.
I’d long ago done a title search on the property and I know he and his wife own the house via a self-settled trust. But I don’t push him on it since he hasn’t raised my rent in 3 years (maybe because he knows I’m a consumer attorney). For San Jose 3 years of constant rent is quite good.
I agree. Being a landlord must be total hell. Invest in REITs and make 8% return. I hear landlords brag about making a $3000 per year profit. I can make that by mowing lawns. Add to the the insurance, repairs, mortgage/loss of opportunity (if cash) and likely drop in RE value and you would have to be stupid to rent. Most folks are using ideas gleaned from years ago to think that renting is a good idea. They need to educate themselves.
I looked at my options for investments in 2008. A landlord hopes to make $3,000 a year profit if they have a steady tenant who does not trash the place. Hiring a management company is very expensive. I sold my house as the prices were falling right after the peak of the Bubble and listened to my accountant who said buy SLV, GLD and USO and half in a PIMCO Bond fund with that money and rent a nice place until the Housing Bubble passes over which he said could take many years.
I am so happy I did. that house is now 40% down from where I sold it and these equities have more then doubled. No complex tenant or management problems either. I don’t see the RE market turning around in the near future. Let those Big investment companies buy all the houses and condos they want. they can have them!
Ive been a landlord for eight years and love it! I have beach property I rent for a thousand dollars a week for only a twelve week season!
Wait until 3 families move into the rental. The agreement can say only one family, but good luck with that.
I’m sure Kal-ee-fornia, Mass, NY, NJ, IL, and similar Leftist Peoples’ Republiks have absurd levels of tenant “protection” laws, but here in the F-L-A I can have armed deputies tossing them and their shyt in the street–literally–in 10 days.
Careful screening usually obviates such nastiness.
The Feds are desperatate to reinflate the housing bubble at all costs. People feel wealthier whe they perceive equity in their house makes them richer. Plus, they can use the Housing ATM once again. The rental game isn’t as easy as investors think. With layoffs continuing and wages stagnating, finding a decent renter won’t be easy in areas where blocks of houses are for sale. Especially when some can live rent-free in their homes when banks don’t foreclose. The fundamentals plain suck and all the King’s men won’t be able to do a thing, except prolong the agony. Sooner or later they will have to just let it rip.
http://www.westsideremeltdown.blogspot.com
Long time reader here, never posted before as I prefer to read all your comments, especially when I get that itch and feel like throwing in the bubble. Anyway the reason I decided to post, I was driving around and saw this nice home, called the realtor just to inquire on the asking price, informed it was in escrow, blah, blah..here’s juicy part. He recommended to try to buy now as they’re rumblings that beginning in Jan 2013 FHA might change the first time buyer guideline to 10% min down vs 3.5% and the buyer will have to have a credit score above 600. He continued to say that he hopes it doesn’t happen because that will wipe out 80% of buyers out there, my response was that I understood his position but “I” hoped it did because I know I will meet all the criteria and will have less competition, the possibility of someone he barely qualified to rampup the price forcing to walk away, said that was very true on my end..anyhow , anyone heard of this?
Sorry..I just read my post and there are a couple of missed spelled words in there or that don’t make any sense lol..like throw in the bubble, I meant towel. Towards the end I was talking about some other buyer who barely qualified jacking up the asking price and forcing me to walk away..I’ll do betters next time, I swear lol
I’d like to hope that’s what the FHA has in mind, but I haven’t heard any mention of it anywhere. Could be just another Realturd pressure sales tactic.
Yeah was thinking of buying last spring but decided to wait till fall to see if things got any calmer but seems like the multiple bidding has gotten worse. Any thoughts?
Exactly. This summer was ridiculous in CC. Prices are up at least 50-70K from where they were last year at this time. There’s literally 1 house avail in the price we want to pay. One. nothing new for weeks. I too was hoping by fall/winter the craziness would subside, but it most definitely won’t with 1,2, 3 houses on the market. For now I enjoy the 2 bdr 1 bath home we rent in CC at 2008 prices and wait patiently for the extra bedroom and yard …
I have come to understand, regularly reading this blog, that there was a change at some point on how long a bankster had to hold on to a foreclosed property before they had to take the write off. I believe it went from one year to four years. When was this change made and when will that fourth year be up? Can they rewrite this change to extend it?
You’ll get a lot of stuff wrong if you just rely on this blog:
Look up 12 CFR 167.1
Basically it’s 5 years + a one time 5 year extension
That may change as banks if banks are allowed to rent out REOs
Doc, you speak the truth as usual. Here’s something else to chew on: families that are used to “owning” are used to a tax write-off on interest and property taxes that renters don’t get. That means that rent actually feels more “expensive” than a mortgage. Add to this that: 1) people who have lost their house usually enjoyed a year or two of rent free living, which warps perspectives, and 2) for all the talk of investors fixing up rentals, most SFH rentals are crappy places in decent neighborhoods–places that have something seriously wrong with them. For all these reasons, going from owning to renting really sucks. There will be a lot of heartburn on both sides of the renter/landlord equation in the coming years.
I am curious how hedge funds will manage thousands of rental homes? I know there was a Japanese investor back in the late 1980’s that bought many homes in the Santa Rose, CA area and rented them out for about 15 years. He managed to have an easy time of it because he kept the rents quite a bit lower than the market rate….and then when he went to sell these houses the locals went into a litigation tizzy as they would have to either buy a house or start paying market rates for their rent.
private equity investors have no idea what they are getting into.
renting out single family homes is nothing like owning an apt building.
do you think renters are going to take care of a property? leaky roof?, cracked driveway?, water in the basement?
unless they package the majority of these properties as rent to own… they can throw out all their spreadsheet assumptions.
Pop, you’re preaching to the choir.
Like you , I hope they do make lending requirements more stringent, but don’t hold your breath. As most here have noticed the Government and Fed. Res. continue to throw everything including the kitchen sink to prop up housing prices. Their is no reason to believe they are going to stop anytime soon. Please remember they have been artificially supporting housing prices for over four years now. It’s not going to end until the dollar collapses through massive sovereign debt and treasury bond failure. Japan has been doing the same thing for 22 years + , America will probably do the same until everything collapses.
I’m not saying that you should buy, but if you are like me you’ve waited 7+ years renting. Lets face it, one is only alive for so long. Families don’t wait, kids are only kids for so long.
Good luck with what ever path you choose. We’re going to be on this blog for the rest of our lives moaning the government’s efforts to manipulation of the real estate markets.
Say it ain’t so….
Three times this has happened to us. We spot a home on trulia or zillow, we call on the home and told it has sold a few days later it dissapears from zillow or trulia. Then three months later we find it shows a sale date the is only about two weeks old.
Made offers on houses that were in fact higher than the sale price on some homes only to be told our offers were back up offers that the bank never got to see.
Still much realtor fraud going out there.
Concerning investors managing a large number of properties; I read awhile back one big investor has a business plan (adopted from a German group) that has in the rental agreement the renter is responsible for ALL maintenance, and that they agree to having their wages garnished if they break the lease …. solves many “problems” …. should I look for that article? oh btw, of course I have a home near Las Vegas, NV for lease, and I’ll offer an option to buy … but I’m old fashioned … I will not garnish your wages, but want big deposits and several months pre-paid.
One thing I find fairly consistent with landlords, some of whom are in this comment section. They all talk of the nightmare, they complain, they point out the misery and yet 90% of them are ready in less than a second to buy another rental if they find a good deal.
Second thing, the Private Equity funds simply hand the properties over to seasoned nationwide (some in-house) property management companies. With the scale they can ride through the hazards of the bad tenant etc without noticing. Besides a large part of not having landlord headaches is having the financial deep pockets that allow you to be selective in granting tenancy. You would be surprised how many of those bad tenants can be traced back to a landlord that bent their rental criteria or was desperate to simply get someone into a property to gain cash flow.
That being said, some of these PE firms are getting into joint equity agreements combined with structured finance arrangements that give the Feds a piece of the game.
Think on that for a moment. You work until mid-year for tax freedom day, you pay your rent to a joint govt corporate crony (if you are OK to buy you get a loan where you owe to FHA backed crony), you buy your car from Govt owned GM, and all students from this point forward can only get Govt student loans. Anyone see a pattern here? How much more of your life are you living for the govt since the crash?
Seems like there may be more than one reason the criash was not allowed to be solved through market forces.
I agree about all the lanlord comments on here. And, I bet private equity or any institutional money manager would do pretty well renting out homes in mass. Deep pockets, professional property managers, economies of scale, etc.
Agreed. I’ve seen it done before and done successfully. Many SFR’s can be managed will enough by a professional group. Mom and pop owners got nothin’ on the pro’s. Again, I’ve seen it before. It’s not rocket science and they’ll do it well enough to get their 7% yield.
Wait just a minute! Are you saying that these hedge fund investors want to rent homes to the “47% of Americans who Romney called victoms & who aren’t responsable enough to take care of themselves?”
They are responsible enough to work the system without mercy. If you know how to work Section 8 housing, Food Stamps, welfare, etc., you can have a very nice life. These are people who’ve figured out that they can live a lot better in the system than they can working some low-wage job. They’re not victims, they are victors.
Hell yes if they have Section 8 vouchers. Getting a check direct deposited into your account every month via Turbotax Timmy is as good as it gets. I have some anecdotal evidence of friends who are landlords. Most of them try to game the Section 8 system. The tenants usually have shady financial histories, but when you are guaranteed you’ll get a rent check everything month back by the government…it doesn’t get any better than that!
Unfortunatly, the number of people who aren’t responsible enough to take care of themselves, or just choose not to, is much higher than 47%.
That was supposed to be a reply to SEAN. My appologies.
Joe Average, I ment that as tongue & cheek based on the comments here & Romney’s elitest remarks.
Doctor Housing Recovery,
I have a couple of observations. First, wouldn’t it be basic economics that if all this was true (which I don’t believe) that there would be a flood of rental properties on the market when these trusts/funds start to rent these “investment” properties? Explain how rents can go up when you have rising inventory? Before you answer see my second point.
Second, I rent single family homes and the first thing they want to see after my pay stub is a credit report. The current place I am in now wanted to see my bank statement! How are the deadbeat ex-homeowners going to rent these over priced rentals?
I believe that this is a bunch of election time noise. Is it possible that there are some deals going on? Maybe. Does that mean that the housing market is fixed and we are back to the good old days? Not likely. The reality is that more rentals on the market most likely means downward pressure on rents. Deadbeat ex-homeowners are not going to be the target market of any intelligent landlord (except MB of course)…
Are all these shadow inventory homes sitting there empty? Sure, some may be empty. But many have people currently living in them, waiting to be foreclosed upon.
Where are they going to go? If they were part of a foreclosure/short sale, they’ll be in “credit jail” for 3-7 years before they can buy again. They need a place to live so either they’ll move in with someone (unlikely if they were in a SFH to begin with or they’ll rent.
It’s really not the complicated. Some landlords may wait for tenants for perfect credit, others may ignore the foreclosure ding on the credit report if they have a good income coming in.
A currency is only as strong as the things you can buy with it! As long as the US dollar was the required currency for the purchase of oil, other assets inflated accordingly. But now the US is overinvested in the housing sector and has nothing to export and the mortgage-bundling gambit has set in motion a worldwide financial crisis that only ends one way: massive deflation. But deflation is death by a 1000 cuts because asset-owners will not give up the hope of reflation until the process-servers come knocking on the door and force the resolution of bankruptcy. The next owner (of commercial real estate, for example) is then capitalized at a lower base and can afford to slash rents to meet the requirements of the newly impoverished workforce.
In regards to Section 8 renters. I would think Section 8 tenants could be a disadvantage – not in terms of whether or not the rent gets paid but methinks that Section 8’rs are less likely to ever leave (not for job relocation), so in places like Santa Monica, if a Section 8’r stays for 10 yrs and is paying $800 per month rent, the place is now worth $1400 per month rent. Has anyone done studies on avg occupancy term for a Section 8 versus a person gainfully employed?
Becoming a landlord in any rent controlled area doesn’t make sense. Unless you bought that Santa Monica property 50 years ago or out right inherited it…it is a losing proposition. In areas where there is no rent control, getting a Section 8 check every month makes sense and is reliable as the sun coming up in the east every morning.
In the past few years in the NYC area, the number of section 8 units decreased while demand for them went up. From what I read a few years ago, many landlords chose to leave the program do to the fact that despite the government backed income they were receiving, it wasn’t enough to offset expenses & they could get double the rent if the unit was on the open market. As a result of these decisions, the wait list in some areas like Westchester County is about 5-years to get into a section 8 apartment.
If you receive section 8 or other meens tested benefit, it doesn’t pay to be employed since said benefit decreases as income rises. That leeds to the lazyness arguement of those in such programs & against such programs in general by the batshit right wing.
Santa Monica no doubt has rent control to discourage rental properties under the guise of having a pro-renter law. Rent control discourages the establishment of income properties in that area.
Sean – Your post circles around and answers itself. When income increases, section 8 benefit decreases and the Section 8’r has to contribute more toward their rent. In your first paragraph, at least in California, rents collected for a property are determined by the surrounding market and then the Section 8’r gets aid based on their income and supplements the difference. Section 8 landlords oftentimes get two checks for rent each month. One from the Govt and one from the tenant. If NY is not using this market based system then it is an implementation different from the CA section 8 system where market rate rents are collected on all subject properties.
One more thing. While many people “game” the system, there are plenty who are ashamed of falling down so far that they need help. Let’s not cast such a broad brush. This is a very rich country, the safety net is not the problem. Restriction of Capital and regulation is the problem. Yes, even the regulation that caused this crisis. If the market were let loose, the safety net would be fully funded without worry.
this is the height of foolishness. The only model that makes sense for big
investors is big MFDU complexes, where they can get scaling efficiency on the
maintenance which lets them keep up the property. a bunch of loosely scattered houses, will just turn into slums. the properties have already had about 5 years of neglect, turn them over to Wall Street and i’d bet in 5 years the roofs will be caving in
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