Are the Institutional Investment Firms Buying Rentals Out of Their Minds? (Brandon: for sale, 2013)

[Not_liking_FL]

There was an article in the Tampa Bay Times not that long ago that talked about the inflated rent prices from Blackstone and other cash buyers. I'll try to find the article later when I have more time.

[kmarc]

Originally Posted by MortonR

If this is even remotely the case, it's good for me because it means they'll potentially drive up property values in my neighborhood. I'm not going to be selling or buying any time in the near future, so as long as the market goes up I'm all for it.

I will say that they do seem to be maintaining the properties, which is a good thing. As an HOA board member I had some serious reservations about these, mainly dealing with how well they would be maintained. So far, so good.

I know that three of the four properties in my neighborhood were bought at market and were not distressed sales of any sort - these firms paid full market for them when they were sold, so their profit margins on them at this point are slim at best. If they don't have some cash flow over the next year with these I don't see how they can come out ahead short of a significant bump in the market.

I know that's not necessarily the case with other areas, but I know of five properties that have been bought and flipped as rentals by these firms, and four of the five were purchased at market for cash. None of them are occupied. Knowing the prices paid, that's nearly $1,000,000 cash they put out with no immediate return.

Doesn't look like a good investment to me unless they're holding out for a big jump in the market. They're not earning a return on vacant properties, and the appreciation certainly doesn't come close to the rental income....

RM

The upside to this for individuals is that some who may be underwater on a higher end home will have a chance to get out from under, if they are observant and play their cards right. I also think there's probably some underlying securities action tied in here. And probably some tax advantages and that sort of thing. Meanwhile, if they're maintaining the homes and pay the fees and if the people they rent to aren't a problem, then that's a good thing.

But it's not a permanent situation. Believe me, these folks know how to get in and out and play angles you never knew existed. They MAKE the markets. And don't just think in terms of them selling off to individual buyers, no. Wouldn't surprise me to see them sell to foreign bulk buyers. If that happens, then you may have some problems, as things like occupancy and use are different concepts to people from other countries.

[kmarc]

It also occurs to me that we may see some of these firms become the "new" banks, offering things like mortgages, insurance, various fee-based services, etc. This way they're out of the physical property, but reap the rewards of fees and interest. One thing these folks LOVE is fees.

[MortonR]

Originally Posted by vaughanwilliams

Even in my ghetto neighborhood, seeing single family homes turned into rentals isn't an ideal situation, but what are you going to do? The investment firm owns the property fair and square and can rent it out and charge what they want. They can even turn it into Section 8 housing (I've seen it happen in some pretty fancy neighborhoods). Buying a home for cash means no interest payments (or insurance if they want) so lowering the rent probably won't cut into their bottom line as much as you think.

Our deed restrictions expressly forbid Federally funded properties such as Section 8, I believe. I'll have to check, but I seem to recall something to that effect when reading the bylaws.

Not to mention they would be seriously under water if they tried something like this. Even if they have limited debt service, their break even point has got to be relatively high. The cash they used to purchase these properties wasn't free. It had to come from somewhere.

The break even point for an income property is a ratio that shows the annual income level required to cover operating expenses and debt service. To calculate the break even point, the total of annual operating expenses plus annual debt service is divided by the annual effective gross income and the result is expressed as a percentage. A break even point of 100 indicates that a property is making zero profit. All of the property's income is required to pay debt service and operating expenses. When purchasing an income property, the typical range for the break even point is 60 to 95. The lower the break-even point, the more profitable the property. To put it another way, to be profitable, an income property’s annual effective gross income must be greater than the cost of it’s annual debt service plus annual operating expenses.

I wasn't suggesting that lowering the rent would affect their bottom line, the lack of renters over time would, however. Occupancy rates are the big deal when it comes to rental property, and if your occupancy rate is lousy, you're losing money.

These people aren't in this to lose money. As soon as they see cash flow even hinting at going negative, they'll be out of here in a hurry.

RM

[cfbs2691]

The same thing's going on in South Florida.
It's insane.
3 bedroom homes are being rented to extended families, where there are 6 adults and countless children living in one home.

[MortonR]

Originally Posted by Not_liking_FL

There was an article in the Tampa Bay Times not that long ago that talked about the inflated rent prices from Blackstone and other cash buyers. I'll try to find the article later when I have more time.

Here is a relatively recent article about the situation. They don't mention rents, but there is a good map on the bottom of the page showing the properties that have been purchased.

Graphic: Where is Blackstone Group buying homes in Tampa Bay? | Tampa Bay Times

The two that are active in my neighborhood appear to be "American Homes 4 Rent" and "Invitation Homes".

They have bought four homes in my neighborhood for nearly $1M total between them. All paid cash and bought at the listing price. None are currently rented from what I can tell.

RM

[NHborn]

Originally Posted by kmarc

The upside to this for individuals is that some who may be underwater on a higher end home will have a chance to get out from under, if they are observant and play their cards right. I also think there's probably some underlying securities action tied in here. And probably some tax advantages and that sort of thing. Meanwhile, if they're maintaining the homes and pay the fees and if the people they rent to aren't a problem, then that's a good thing.

But it's not a permanent situation. Believe me, these folks know how to get in and out and play angles you never knew existed. They MAKE the markets. And don't just think in terms of them selling off to individual buyers, no. Wouldn't surprise me to see them sell to foreign bulk buyers. If that happens, then you may have some problems, as things like occupancy and use are different concepts to people from other countries.

This is what Im counting on and why I decided for a loan mod instead of defaulting. Hope it works.

[vaughanwilliams]

Originally Posted by MortonR

Our deed restrictions expressly forbid Federally funded properties such as Section 8, I believe. I'll have to check, but I seem to recall something to that effect when reading the bylaws.

Not to mention they would be seriously under water if they tried something like this. Even if they have limited debt service, their break even point has got to be relatively high. The cash they used to purchase these properties wasn't free. It had to come from somewhere.

The break even point for an income property is a ratio that shows the annual income level required to cover operating expenses and debt service. To calculate the break even point, the total of annual operating expenses plus annual debt service is divided by the annual effective gross income and the result is expressed as a percentage. A break even point of 100 indicates that a property is making zero profit. All of the property's income is required to pay debt service and operating expenses. When purchasing an income property, the typical range for the break even point is 60 to 95. The lower the break-even point, the more profitable the property. To put it another way, to be profitable, an income property’s annual effective gross income must be greater than the cost of it’s annual debt service plus annual operating expenses.

I wasn't suggesting that lowering the rent would affect their bottom line, the lack of renters over time would, however. Occupancy rates are the big deal when it comes to rental property, and if your occupancy rate is lousy, you're losing money.

These people aren't in this to lose money. As soon as they see cash flow even hinting at going negative, they'll be out of here in a hurry.

RM

I have no idea what the local law is, but it's illegal in some places to deny Section 8 housing (or a halfway house) in a neighborhood. Either way, you're probably right about it being a money loser for the investors.

I suppose these monied investors are heaven sent for people wanting to sell quick with no hassle, but there's something about them and the flippers that bothers me.

[MortonR]

The couple I mentioned in my OP that were relocating had three full price offers the day they put their house on the market in February. One of the offers was cash, from one of these investment firms.

They knew what was going to happen with the property and were not keen about it, but I would have made the same choice had I been in their situation.

I haven't checked in the last week or so, but as of a couple of weeks ago the property was still vacant.

As for the Section 8/halfway house thing, I think one of the ways it's skirted is by denying multiple family properties. That wouldn't necessarily apply to Section 8, but it would to a halfway house, I suspect.

RM

[The Villages Guy]

Originally Posted by MortonR

Here is a relatively recent article about the situation. They don't mention rents, but there is a good map on the bottom of the page showing the properties that have been purchased.

Graphic: Where is Blackstone Group buying homes in Tampa Bay? | Tampa Bay Times

The two that are active in my neighborhood appear to be "American Homes 4 Rent" and "Invitation Homes".

They have bought four homes in my neighborhood for nearly $1M total between them. All paid cash and bought at the listing price. None are currently rented from what I can tell.

RM

Great map. I'm surprised to see they even bought a couple of houses in our neighborhood, as they aren't exactly cheap.