It is a challenging time right now for homebuyers. However, if you think that it is tough buying one home – try buying 80,000. As if buyers did not have enough to contend with, global investment companies are now entering the residential real estate market. They are buying large swaths of single-family homes and renting them out for investment income.
As reported in an article published by Bloomberg: “Invitation Homes Inc., the largest U.S. single-family landlord with roughly 80,000 houses, posted higher occupancy rates and revenue as renters decided that life during the pandemic is better with extra rooms and a backyard. Now, Invitation Homes is buying houses at a time when low mortgage rates and the desire for more space has placed suburban houses in high demand.”
As the article highlights, Invitation Homes already owns a significant portfolio of single-family homes. The strategy of large-scale home rental began in the aftermath of the financial crisis of 2008/2009. As stated in the article: “The company was born out of the U.S. foreclosure crisis, a leader among Wall Street-backed firms that bought homes at heavy discounts and figured out how to operate them profitably.” At that time banks were foreclosing on single-family homes at a record pace. Most banking models do not allow for holding individual real estate properties. Therefore, the banks needed to unload these homes in the aftermath of that crisis. Companies such as Invitation Homes stepped into that market, making large-scale purchases.
However, they were not alone. Other large Wall Street investment firms such as Blackstone, JP Morgan and Brookfield Asset Management also entered the market, purchasing large chunks of real estate at discounted values. This investment strategy has worked out for these firms. It meshed well with changing consumer tastes. In the aftermath of the housing crisis, many families needed to rebuild their personal balance sheets. During that process, applying for a mortgage to buy a home was not an option. Because of this, many consumers turned to the rental market. Over the last decade, single-family home rental has risen across the country.
Fast forward to 2020. Several trends in consumer real estate preferences changed radically during the pandemic. We have written extensively about this in the past (Soaring Home Prices Helping Homeowners). The residential real estate market now finds itself in a situation in which demand for new and existing homes is at an all-time high. This is taking place at the same time in which the supply of properties is at an all-time low. Add that all together, and life for first-time home buyers and single-family home renters is challenging.
This Bloomberg article was written in August of 2020. At that time, the company had plans to buy 80,000 additional single-family homes across the United States. As the residential real estate market continues to experience unprecedented demand, this will not be an easy task. From the article: “Finding another 80,000 homes to buy won’t be easy. A federal foreclosure moratorium passed by Congress as part of the pandemic relief effort means there are few distressed properties on the market. For the most part, though, it bids on homes as they hit the market, competing with first-time homebuyers and other single-family landlords.”
These investment firms have cash immediately available for purchase. In addition, with such a large number of homes to buy, they are most likely not too picky. Chances are that they are not overly particular about the condition of the home. We imagine that this is a very difficult situation for individual home buyers to contend with.
At Aloha Capital, we have come across large scale institutional SFR buyers since becoming a lender on these deals in 2015. Interestingly, these buyers have had mixed results, as the strategy of entering markets just because they appear on the surface to have good cap rates isn’t all that’s required to do well in the rentals business. In fact, some of the Fund’s first prolific borrowers were able to find an edge in competing with the big shops, since they were actually living and operating in these attractive local markets. They have thus seen large scale buyers come and go. But there’s no question that here in 2021, the supply shortage issue for housing is affecting everyday consumer buyers who have to go out and compete with big money just to find a place to live. Aloha Fund investors are in a great position as a private lender to real estate investors who update housing stock, improving properties for both renters and owners.
Steve Sapourn is an active real estate investor, Aloha Capital’s co-founder, and portfolio manager. At Aloha, Steve has overseen more than 1300 real estate investor loans in 35 states. He has managed alternative investments in a variety of asset classes for over 25 years. He has deep experience in designing low-risk portfolios that reliably outperform benchmarks. Over his career, Steve has served as portfolio manager for a Fund of Funds, where he analyzed hundreds of alternative investment strategies. In addition, he has developed and implemented quantitative trading strategies in the futures, stock, and volatility markets. Steve’s long and diverse career benefits Aloha’s investors.