WatchHi folks,
It's no secret by now that high dollar investment firms have been buying up a significant fraction of low end real estate in the United States. Just the foreclosure to rental market alone this year is expected to be a $100bil industry. That doesn't include short sale or conventional sale to rental market.
Companies like Waypoint (Oakland based) are buying up property all over CA and currently owns over 1800 homes. Blackstone (NY based) is buying about 40 houses per week in the greater Sacramento area:
Low end real estate investment is currently more attractive to many compared to the stock market, CDs, or commodity/materials/currency investment due to greater ROI. For example, there are no shortage of zip codes in the Bay Area that have 7%, 8%, 9% or even larger annual rent:price ratios. And because these investment firms are typically coming with cash and they have very good relationship with realtors and banks due to a reputation of closing very quickly without hick-ups, they are getting first crack at anything worthwhile. Several points:
- This will surely continue for low end real estate as long as it remains significantly cheaper to buy than to rent. With the real estate market surge that we've seen in 2012, it's not quite as attractive to get in this game as it was in 2010-2011 for instance, but it's still difficult to find a better place to put your money today. If the market continues to rise (and rents don't), eventually we'll hit a threshold where it no longer makes sense and the bulk rental investments that we are seeing will cool off.
- How are new families/first time buyers who are needing to finance going to compete with these firms that are bringing cash and already have everyone involved in the home buying process on their side in terms of relationship?
- Most importantly, what will be the short and long term implications of entire neighborhoods in Pittsburg, Vallejo, Bay Point, Antioch, and Concord for example being owned by none owner occupied investment firms and/or private investors? I've thought about this a lot while hunting for my own investment properties as owner occupancy continues to drop in the low end real estate market.
In general, high owner occupied neighborhoods are attractive to new buyers/renters. At the same time, it's in the interest of the landlord to upkeep his/her property to keep vacancy rate low and rental price as high as possible.
As investor owned homes continue to increase in low end areas, this will give landlords more control over rental prices, but of course it will also introduce more landlords which will increase their own competition (unless the same firm owns all/most of the homes within the neighborhood). I guess ultimately the market (supply/demand) will have the greatest influence in what landlords can charge for rent and the rental price swings from other factors will be small in comparison.
Maybe I am over thinking this a bit, but you have to stop and think for a second that we've never in the history of real estate had this rate of single family homes being bought for rental purposes like we are seeing today. There obviously will be implications.
Any thoughts?
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BayArea says
Yeah, one question. How can rental prices go up, and wages remain stagnant?
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BayArea says
Short term: neighborhoods get full of people that don't care about the property they live in. Long term: rents go down, maintenance deferred, another slumlord is created.
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Oakland, CA
The Professor says
What you describe sir is also known as a "bubble"
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Mountain View, CA
bmwman91's website
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BayArea says
In past history, sure. I hope that history repeats itself, at least compared to the alternative.
The alternative:
As you said, we are in historically unprecedented territory. America, depending on who you ask anyway, is in decline. We might see rents go up anyway as the financial sector owns housing and our government, and they can really do as they please. America might just end up like much of the rest of the world with 3+ generations of a family packed into every 3BR to make the rent payments. The wealth disparity is growing, and half of the lower-earners in this country are too stupid to vote for things that would protect them because of partisan bullshit.
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Seattle, WA
David Losh's website
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BayArea says
We actually did see this Real Estate wholesaling after the Savings, and Loan scandal.
It's been tried a couple of other times, and it always ends the same.
These investment groups will package the properties into Real Estate Investment Trusts then sell the cash flow minus maintaining the property, and management fees.
This will go on until no one can stand it any more, or the holding period expires. Slowly but surely these properties will be sold back to the public with "special" financing until all the Investment dollars are returned with a profit.
So don't worry, I personally think these properties will be coming back sooner than later, because no one wants to deal with a string of properties far flung with a constant set of whiners as renters.
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Kent, WA
John Bailo's website
The Professor says
Basically if you get people living with low cost goods, low taxes and trading in their cars for "transit", and not having kids, they then have lots of spendable income. However, if they monopolize the housing market and set the price high for even the smallest bungalow, they can then take that excess income from you.
For example, after going through long periods of financial distress, in the last 8 years, I've been saving heavily, using tax free investments like 401k, making my own stock picks, putting cash into the bank, making a little money on the side.
And you know what...the result of all that is that if I spent my entire net worth, I could basically afford a HUD home in a semi-infested gang neighborhood or else blow it all on a condo destined to drop in price.
This is the "can't win" scenario which I believe 98% of people are being set up for. A world in which the casino has all angles covered and you can't make a move, get a gain, or save and invest your way to riches unless it comes from state approved lottery.
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Seattle, WA
David Losh's website
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John Bailo says
Well, the casino is rigged in your favor, and you just outlined how.
You've been saving, using tax free investments, buying some stocks, and making a little money on the side. Well, that's your working capital, now what?
That's the question, now what?
What can you do, what can you make, what can you buy, and double your money?
Some people go to garage sales every week end, then sell the stuff on E-Bay. Some people buy, and sell cars. Others go to auctions for furniture, or antiques, then sell stuff by private showing.
If you take the same mind set, and apply it to a Real Estate purchase you can do well.
While you are at garage sales ask what the people are doing, are they moving, are they selling. Look around your neighborhood, look for a place that has some distress, and ask the owner if they had thought of selling. Look for land lords who have owned forever, send them a letter and see if they might do a seller financed transaction.
No one is ever stuck. Real Estate is a transaction between two individuals. Most people just need to find the right fit, rather than force a hysterical purchase.
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David Losh says
Amen.
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Baltimore, MD
BayArea says
You just described most of Baltimore City! It's been like that for years and large portions if it are slums where only blacks and mexicans will live.
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Scottsdale, AZ
robertoaribas's website
50% of germans rent, and neither their society nor their neighborhoods have collapsed as a result.
It just is what it is...
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I think the solution is to allow more homes to be built. Simple supply and demand problem. Slightly complicated by NIMBYs and other rent-seeking bodies.
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Scottsdale, AZ
robertoaribas's website
Peter P says
what the hell are you talking about? there isn't any law against building homes... Not much is being built in Phoenix because the existing market is selling them cheaper than builders can build them...
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San Jose, CA
robertoaribas says
Have you been in Germany?
Wish yourself to have all German tenants.
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San Jose, CA
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robertoaribas says
Well, you're not in the Bay Area. The local agencies make it nose bleeding expensive to build anything. My brother built his own house 2 years ago. He designed a 2,400 sq.ft. house on a 6,000 sq.ft. lot. Some neighbors complained his house is too big so he had to redesign and built a 2,100 sq.ft. house instead. Permit, design and engineering fees alone ran just over $70k.
I worked on a custom-built house on a nice rolling hill in Woodside. It took the owner 3 years to get the project approved because the City's geologist is an effing moron. 3 effing years to get a permit to build a house. 3 effing years.... How much time, effort and money did the owner have to spend to get a building permit? 3 effing long years.........
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Mountain View, CA
bmwman91's website
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How could you?! Don't you know about the nesting season of the spotted owls?! The live in other states, but they COULD fly to Woodside and take up residence. Why would you want to build a big ugly house and rob them of a home? What did the spotted owl ever do to you?! God, I bet you are one of "those" people that also thinks vaccinating their children is a good idea. Here, let me get you a copy of the pamphlet I picked up at Whole Foods, it will show you how to prevent Polio and Smallpox with an Acai-Hemp seed blend. Steve Jobs was a BIG believer in the curative properties of this holistic remedy!
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El Cerrito, CA
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David Losh says
A friend of mine traveled through Zimbabwe. He brought back some of these. Holding them in my hand gave me a creepy feeling. I asked him how the economy functioned. He said "they make it work".
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El Cerrito, CA
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There are those who are part of government, those who are vested and part of 'the franchise'. The rest trade whatever they can among themselves.
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El Cerrito, CA
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It will be interesting to see what happens to currency and property taxes after most of the property is in the hands of our 'nobility'.
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Rents will be subject to cartel pricing and will 10x over night.
People will move into squats and abandoned cars.
Hookers and drug addicts will occupy the units.
Rental cartel snipers will fail to secure the units as hookers and drug addicts form better armed squatters militia.
Cops, disdainful of cartels, ignore calls for help and, in some neighborhoods, join in fire fights on the side of the hookers and drug addicts, claiming some samples as commission on their services.
Cartels will be bailed out.
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El Cerrito, CA
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Sounds like the grower economy in northern cali.
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bmwman91 says
This may seem tounge-in-cheek, but it is true. One of friends, when I lived in the bay area had horses and boarded at a public stable. The stable had acess to a state park through another state owned property that was not part of the park. Then some endagered eagles came and nested on the state owned proeprty and they said the riders could not ride their horses through the porperty to get to the park. I was like what-eagles in the trees means no horses on the ground?
I never could understand the logic and thought she was pulling my leg-but no, she wasn't. If they are so sensistive-perhaps there is a reason why they are in danger? I mean pigeons don't need no protection??
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I don't think big investment firms have any intention of keeping the houses for long - mass renting is going to come with difficulties. Also, they know that interest rates will be going up in a few years, and house prices will have nowhere to go but down at that time (wages stagnant and/or falling means fixed monthly payment, either to landlord or bank). So they sell at that time and leave mom and pop holding the bag (again). If you own, just be sure to keep your eyes open and get out when you see them eyeing the exits.
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Scottsdale, AZ
robertoaribas's website
moonup says
I'm not so sure; I have two acquaintances managing several hundred properties each for these firms... They have some pretty slick automated procedures in place for tenants, managers, repairmen etc. Hell, i'd love to have their software!
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robertoaribas says
What's the protocol for putting down free fire fights between rival starving neonazi cannibal tribes?
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The "implication" is that this curve goes up:
http://research.stlouisfed.org/fred2/series/GINIALLRH
luckily, nobody in this country is actually exposed to the real data detailing the decline of what we once had here.
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Seattle, WA
David Losh's website
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robertoaribas says
They have great software that keeps things chugging along. In time they will consolidate into apartment buildings or mixed use. The individual houses will be sold off with special financing to make the whole thing happen.
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Also, I couldn't think of a worse place to be a landlord than in San Francisco. These investment firms are going to take it on the chin when they go to sell in a few years and realize that their protected, rooted tenants knock $100k off their sales price.
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Madison, WI
Agreed, they might be buying location 10-20 years before location is known. Simply wait until the tenants trash the homes out then tear them down and put up way more rentals
instead.
David Losh says
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Atlanta, GA
moonup says
I remember in 2005/2006 when apartment communities were converting into townhomes/condos for sale. Guys, it's all about rent vs. price ratios. If prices climb significantly above the ratio's historical average, investors sell the property. If prices are at or below the ratio's historical average, they keep renting out the properties that they do own and even go out and buy more properties to put out for rent.
Right now, investors are buying for the purpose of renting. Prices can fall some and that's ok. These investors are only in trouble if rents fall. They'll keep renting out their properties until there comes a point where cashing out is more attractive (if prices climb significantly).
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Home prices follow the economy. Uncle Sam is going to need to balance his checkbook(fiscal cliff), and when that happens you can bet your ass the economy slows. If I wasn't a renter I would sell right now, I don't see how prices can go up in 2013.
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Buffalo, NY
moonup says
You're working under the assumption that all the laws that protect renters have to remain intact or be enforced. That's the beauty of a 'free market' and deregulation in an oligarchy. You can chip away at the rights of renters by eliminating the laws that require landlords to have any responsiblity to maintain their property, then put in place laws that obligate tenants to make repairs their own dime. You can defund agencies that help tenants prevent illegal evictions or theft of property by landlords. You can monopolize a significant portion of the market and price set properties irregardless of tenant's ability to adapt. If banks and big investors get a taste for slumlording, make no mistake, deregulation of the rental market will come under the banner of freedom.