William D. Cohan has a very interesting piece in the October issue of The Atlantic on Wall Street's renewed enthusiasm for real estate – this time not for the lure of mortgage-backed securities, but for the seemingly less exotic promise of rental properties.
Five years after the housing crash, Cohan writes, "the fast money has returned to the housing market, but in a more tangible way: big, institutional investors are buying up thousands of single-family houses out of foreclosure, renovating them if needed, and renting them out to people who can no longer afford to buy them."
The catch here is that these investors aren't merely trying to flip these foreclosed homes, selling them once their value has gone up. They're trying to pioneer a new business model by "professionally" managing them as rental properties in a climate where homeownership is broadly on the wane.
Cohan focuses on a new venture called Invitation Homes, from the private-equity giant Blackstone Group, which has already spent $5.5 billion buying 32,000 single-family houses in about a dozen markets hit hard by the housing bust. The company has spent another half a billion on renovations. Blackstone's logic, according to Cohan:
Since the crisis, [Jonathan] Gray says, the number of single-family houses being rented has increased from 11 million to 14 million. Yet many people are renting from small, absentee landlords who have not always kept the houses in great condition, and who may not be responsive when something goes wrong. His idea is to “professionalize” the level of service offered to these renters by fixing up the homes and by fixing problems reliably, with on-call maintenance through a 24-hour hotline. “The downturn created an opportunity to create a business,” Gray says, “and in doing so we actually could do something for tenants that never existed before … Wouldn’t somebody pay for that experience?”
I think I would. This idea speaks directly to a problem I've written about before: the complicity of many absentee landlords in turning renting into a second-class experience (and renters themselves into a derided breed of neighbor). In my experience, you can get professional property management in the kind of newer rental high-rise that comes with a weight room and a rooftop pool. Or you can get an older and architecturally more interesting home where the individual landlord (in temperament and leaky faucet response time) is more of a crapshoot.
Typically, you can't count on both: the reliable landlord and the non-cookie-cutter home. But this could be what groups like Blackstone offer, professional management service without the communal weight room.
This idea also gets a little closer to an as-yet-undefined hybrid renter/owner housing model that caters more directly to people who are renters by choice, not homeowners-in-training.
But the scheme described in Cohan's story is not without flaws. Blackstone may well be buying the wrong kind of housing (suburban single-family homes in sprawling metros) to create proof of this concept for a segment of the market that's more urban, professional and uninterested in owning. And there's a reason this hasn't been tried before on such a large scale. It's much harder to professionally manage hundreds of dispersed homes than a hundred apartments in a single building.
Even assuming some of these newer businesses can figure that out, there still remains one giant question: Cohan hints at a rumor that Blackstone may try to securitize some of the rent payments on these houses, a form of financial innovation that may sound all too familiar. That would shift the risk of bounced rent checks onto bondholders, Cohan writes, "in a throwback to last decade, creating a new tangle of warring incentives among landlord, renter, and investor along the way."
Mortgage-backed securities put a dizzying amount of distance between borrowers and banks. What would happen if we did the same with renters and their landlords? As the renter in this situation, would you take that deal if it meant a nicer renovation, a faster repair time? Or would you choose the absentee landlord you (sort of) know over the anonymous investor you don't?