The young business of large-scale single-family rental companies is profiting from the housing bust in more ways than one.
Not only are these national landlords sourcing their properties from trustee and sheriff sales, short sales and even nonperforming single-family loans. Often they are also renting to former owners who lost their homes during the housing bust and the ensuing Great Recession.
Many of these consumers are trapped in renting due to low credit scores and tight credit. But companies specializing in single-family rentals also say the population of renters is growing and many of them are happy to rent.
"Most of the single-family residents we have are former homeowners," said Laurie Hawkes, the president and chief executive of American Residential Properties, which owns and manages more than 6,000 single-family homes in 13 states. Her company's average tenant has held a job for the past six years and makes an income 4.7 to 5.2 times greater than the rent.
"There are some that could buy a house, but they like the flexibility of renting," Hawkes said at a Mortgage Bankers Association conference on single-family rental finance in Washington Monday.
Realizing the growing demand for single-family rentals, companies like American Residential Properties, Starwood Waypoint Residential Trust and others are buying up single-family properties to expand their portfolios. They are getting most of their financing from Wall Street and they are buying properties any which way they can.
Blackstone and Colony American Homes have each issued securitizations backed by their single family rental portfolios. The asset class has gained good traction in the debt capital markets with several more deals exoected to be priced in 2014. Deutsche Bank analysts earlier this year predicted the market could issue up to $5 billion.
To be sure, finding suitable properties has become more of a hunt these days. But real estate experts say the major investors can still buy hundreds of properties per month.
CoreLogic senior economist Sam Khater told the conference that investor buying peaked in the spring of 2013. "There has been a decline but it is still relatively high."
Another reason demand for rentals is strong among new households is the shortage of housing stock. Builders are not keeping up with household formation.
"Whether you buy or rent there is a significant supply imbalance," said Steve Stelmach, a senior vice president at FBR Capital Markets & Co.
The prime age for household formation occurs in late 20s or early 30s, Stelmach said at the conference. And most don’t have the wherewithal to make a down payment on a mortgage.
"There is going to have a lot more renters in this country going forward," Stelmach said.
Clearly this shift to rentals is taking a toll on the U.S. homeownership rate, which fell to 65.2% in 2013 from 69% in 2005.
"It is declining," Khater said. "Over the next two to three years, it could fall into the low 60s."
Mortgage credit is tight and single-family construction has been weak, he noted. Builders are mainly catering to upper income home buyers. That limits opportunities for first-time buyers.
However, the credit picture may change now that the refinancing boom is over.
"Any time the refi market dies up, lenders loosened underwriting on purchase loans to keep the market going," the CoreLogic economist said. He expects underwriting standards will be relaxed over the next year.
American Residential Properties has three kinds of renters, Hawkes said. The first kind went through the financial meltdown and will only sign one-year leases. "We can't tell if they didn't improve their credit or they like having substantial cash flow and calling someone else to repair things," she said.
The second kind didn't go through the meltdown. "But today, they are having difficulty getting a mortgage or can't come up with the down payment. That is a big and growing group," she said.
The third kind is the Millennials (born between1982 and 2002). They like the flexibility of renting and having someone else take care of the house. And they like 2,000 square feet of living space as opposed to an 800 square foot apartment. "Candidly, they could buy a house. Their FICO scores are terrific," the CEO said.
Auction.com executive vice president Rick Sharga noted the some realtors are selling properties directly to investors without posting them on the Multiple Listing Service.
"We are seeing a cottage industry spring up," Sharga said, with local housing market experts bidding on behalf of large single-family investors.
The single-family rental companies believe they have found a sweet spot. Starwood Waypoint Residential Trust is able offer returns similar to multifamily operators with half the tenant turnover rate, according to Gary Beasley, co-chief executive officer of single-family real estate investment trust.
He stressed at the MBA conference that managing single-family rentals scattered around metropolitan areas in seven states would not be possible without technology and the emergence of cloud computing. "That is something that is often overlooked," Beasley said. And it is one of the reasons single-family rentals up until now have been largely mom and pop operations.
Based in Oakland, Calif., Starwood Waypoint had nearly 7,200 residential properties and non-performing loans at yearend 2013. The REIT is an affiliate of the Starwood Capital Group.
In March, Starwood Waypoint purchased a pool of 494 nonperforming single-family loans with an unpaid principal balance of $151 million. The REIT paid $101 million for the nonperforming loans.