Jeff Pintar talked up the fairly simple premise that residential real estate, and particularly single family homes, are a compelling discount when purchased for rental. This is something that’s not brand new, of course, many huge institutional investors have huge multi-billion dollar funds, but Pintar tells us that there are still huge swathes of underwater homes to be bought up.
The foundation is still there — households are still being formed, home ownership levels have returned to much closer to the historical trend, and the level of new home construction has dropped to the lowest levels since World War Two. That’s obviously starting to pick up again, but there’s also the large “Gen Y” generation that is going to drive up household creation — we’re going to need more than a million new homes a year to meet that demand, and construction is around 600-700,000 a year. That’s going to drive demand up.
He says the highest appreciation will be in the hardest hit markets — values should rise, and he thinks the worst markets like Las Vegas, Phoenix, Atlanta, Southern California will be the ones that climb the fastest.
How do you get in? Four opportunities — buy distressed loans from the banks, buy urban infill property that will be appealing to Gen Y, you can buy speculative land and hold it until it eventually hits demand again, or you can do what Pintar did, which is buy single family homes and rent them out at a 5-7% net yield.
How do you get into it? It’s highly fragmented, and very hard to enter the market in scalable size — it has an impenetrable moat and high barriers to entry. You can’t buy in bulk.
There are a few groups for retail investors — Silver Bay, Colony Capital, Mortgage REITs, or land development companies like Oaktree, Lennar, Starwood Capital, or funding local operators in the best markets and invest with the locals. Due diligence on the local operators is key — need vertical integration, acquisition and leasing, transparency, alignment of interest, etc.
The homes that are being bought are at a good discount, with high embedded equity, but renovation management is key and has to go house by house — you need great management and great monitoring technology.
Interesting for all the hedge fund managers ...