Investors snapping up new homes for rentals

apartment-sold-photo-300x200It was widely deemed a temporary play: Large-scale investors buying thousands of discounted foreclosed properties during the worst of the housing crash and turning them into single-family rentals. When home prices recovered, they would surely sell them for a hefty profit. The housing market is recovering, albeit more slowly than expected. Foreclosure volume is way down and home prices are way up, but these investors are not selling.

They are buying more, and now they are buying new.

“I actually think that we’re coming into perhaps the most compelling three or four years that I’ve seen since I’ve been in the business,” said Doug Brien, CEO of Starwood Waypoint Residential Trust.

Brien, standing in front of one of his company’s rental homes in a brand-new housing development in Lawrenceville, Georgia, near Atlanta, says builders are the next frontier for institutional investors.

“For us operationally, being able to have a brand-new home that typically has a warranty, that works well for us. We can also customize floor plans that work for the business,” added Brien.

Starwood Waypoint, which launched its business seven years ago, now owns more than 16,000 single-family rentals, the vast majority of which were foreclosures. So far it has purchased about 200 brand-new homes from builders, with an average price point of around $180,000. These homes represent about 5 percent of the REIT’s portfolio.

“I think the institutional capital is still looking at this very carefully, because there’s a belief, and I support that belief, that it is a long-term hold and there’s yield and there’s appreciation to be had,” said Tim Sullivan, practice leader at Meyers Research. “But the real challenge for capital now, for the institutional capital sources, is that the massive low-lying fruit is gone.”

That fruit, cheap foreclosures, offered investors a relatively low-risk play, because they could buy homes at well below the cost of replacement, and not only would they see rental revenue but also property price appreciation. As this new interest develops, however, builders are starting to offer institutional buyers bulk discounts. Not only does it help builders grow revenue, but it gets them closer to normal levels of production, which has been a real struggle thus far.

Miami-based Lennar, one of the nation’s largest homebuilders, is experimenting with the single-family rental market itself. It made a smart hedge during the housing crash by putting up multifamily apartment buildings. It now has 20,000 apartment units under construction, according to company reports. This year Lennar took that one step further, opening its first single-family rental community in Sparks, Nevada.

“One of the big criticisms of the single-family rental world is that they’re all kind of one-offs in unique locations with unique amenities. The scalability of the management is what gets it complicated. This makes it much more like an apartment community in that it’s all together and can be managed by a single entity,” said Stuart Miller, Lennar’s CEO.

Miller said Lennar will probably start another rental community, or possibly two.

“I’m surprised more builders haven’t already taken the plunge,” said Sullivan.

This article originally appeared on CNBC.com.

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