Single-Family Bulk Ownership, a Low Return Business

WALNUT CREEK, CA—There has been a lot of hype and capital committed to the bulk ownership of single-family homes, primarily due to the large volume of foreclosed properties available from the financial crisis and easy availability of capital. The easy availability of capital has been the handiwork of the Federal Reserve and their zero interest rate policy. However, the bulk ownership of homes is a low margin and low return real estate investment business with the following characteristics:

• Owning a large portfolio of homes scattered around the country is unwieldy and management intensive.
• Most foreclosed homes need significant rehab and repair work that typically equals 10%-15% of the purchase price.
• Management fees can run from 7% to 10%+ of the effective gross income versus 3.5%-5% for apartments.
• Monthly maintenance expenditures can be time consuming and costly.
• Total returns are well below core, opportunistic and value added commercial real estate  investment strategies.
• Disposition of the homes can be cumbersome, time consuming and will usually need to be done in a pool structure and at a significant discount.
• Operating expenses average 60%-65% of effective gross income versus 40%-45% for apartments.
• Higher vacancy of 10%-15% versus 5%-7% for apartments.
• Highly volatile pricing of the homes that are subject to extreme interest rate risk.
• Diseconomies of scale as operating costs increase faster than revenues as more homes are purchased.

We have advised many of our clients not to invest in the business privately or in the public REITs because of the above issues and low overall returns. Whenever I discuss this industry with clients or give a commercial real estate presentation, I ask the audience two questions. One is; “If the bulk ownership of single-family homes is such a good business, why haven’t there been any successful companies in the business before 2009”? Question two is; “What would you rather own, 300 homes spread across four states or a 300-unit apartment building”? The answer to the first question is all the firms that have tried bulk ownership have gone bankrupt (i.e., the largest was a company called Epic, headquartered in the Midwest, which owned about 11,000 homes and went out of business in the 1980′s). The answer to the second question is that everyone in the audience picks owning the 300 unit apartment building.