Some thoughts on the mass ownership of homes by investment funds

Yahoo Finance had a somewhat interesting article yesterday regarding the mass ownership of homes as rentals by big investment funds.

In case you haven’t been following this issue: Tons of homeowners lost their homes during the Great Recession. Because there were so many vacant homes, prices dropped really far, particularly in certain western and southern states. Prices dropped so low that it became possible to buy homes, clean them up, rent them out, and get a rental yield of 7-10% / yr.

Because there were so many homes, and the price of homes is so high, this represented a massive opportunity to deploy capital. Big Wall Street investment companies raised huge funds and bought literally thousands of homes with the intention of renting them out, collecting a yield, and then selling as the market improves.

Not a bad plan, right? Well, the “expert” Yahoo quotes makes the reasonable point that these investment companies were probably underestimating the difficulty of managing huge portfolios of individual homes, which are spread out and have idiosyncratic designs / problems. Bottom line: It’s considerably harder to manage one hundred individual homes than it is to manage a 100 unit apartment complex (leaving aside local issues like rent control).

So, will the private equity players end up screwed? My guess is that they will not generate the kinds of rent yields they forecast, due to the difficulty of economically maintaining large numbers of homes. I expect that the PE guys who bought in relatively close-in areas, where jobs are available, will be bailed out by homes price appreciation. But I expect that the PE guys who bought in farther out areas, where jobs are likely to remain scarce and commuting costs are high, will end up owning homes that no one wants to buy.