Meet Your New Landlord: Wall Street

Jul 21, 2017

Big investors transform suburban neighborhoods by buying up single-family homes and renting them out

SPRING HILL, Tenn.—When real-estate agent Don Nugent listed a three-bedroom, two-bath house here on Jo Ann Drive, offers came immediately, including a $208,000 one from a couple with a young child looking for their first home.
A competing bid was too attractive to pass up.  American Homes 4 Rent   , AMH -0.02%  a public company that had been scooping up homes in the neighborhood, offered the same amount—but all cash, no inspection required.

Twelve hours after the house went on the market in April, the Agoura Hills, Calif.-based real-estate investment trust signed a contract. About a month later, it put the house back on the market, this time for rent, for $1,575 a month.

A new breed of homeowners has arrived in this middle-class suburb of Nashville and in many other communities around the country: big investment firms in the business of offering single-family homes for rent. Their appearance has shaken up sales and rental markets and, in some neighborhoods, sparked rent increases.

Company Town

Big investment firms began buying single-family homes in Spring Hill, Tenn., in 2012 and offering them for rent. Four firms now own about 5% of the houses in town.

Sources: Williamson and Maury County property records; securities filings; the companies
Sources: Williamson and Maury County property records; securities filings; the companies

On Jo Anne Drive alone, American Homes 4 Rent owns seven homes, property records indicate. In all of Spring Hill, four firms—American Homes,  Colony Starwood Homes   ,   SFR 0.49%  Progress Residential and Streetlane Homes—own nearly 700 houses, according to tax rolls. That amounts to about 5% of all the houses in town, a 2016 census indicates, and roughly three-quarters of those available for rent, according to Lisa Wurth, president of the local Realtors’ association.

Those four companies and others like them have become big landlords in other Nashville suburbs, and in neighborhoods outside Atlanta, Phoenix and a couple dozen other metropolitan areas. All told, big investors have spent some $40 billion buying about 200,000 houses, renovating them and building rental-management businesses, estimates real-estate research firm Green Street Advisors LLC. Still, they own less than 2% of all U.S. rental homes, according to Green Street.

The buying spree amounts to a huge bet that the homeownership rate, which currently is hovering around a five-decade low, will stay low and that rents will continue to rise. The investors also are wagering that many people no longer see owning a home as an essential part of the American dream.

“The rental stigma has really subsided,” says Michael Cook, operations chief at closely held Streetlane Homes, which owns about 4,000 houses. “People are realizing that houses are not necessarily the best places to store wealth.”

Corporate homeowners in Spring Hill have turned many single-family homes into rentals.
Corporate homeowners in Spring Hill have turned many single-family homes into rentals.

For many years, the rental-home business was dominated by small businesses and mom-and-pop investors, most of whom owned just a property or two. Big investment firms concentrated on other real-estate sectors—apartment buildings, office towers, shopping centers and warehouses—reasoning that single-family homes were too difficult to acquire en masse and unwieldy to manage and maintain.

That all began to change during the financial crisis a decade ago. Swaths of suburbia were sold on courthouse steps after millions of Americans defaulted on mortgages. Veteran real-estate investors raced to buy tens of thousands of deeply discounted houses, often sight unseen. The big buyers included investors Thomas Barrack Jr. and Barry Sternlicht —who later  merged their rental-home holdings to create Colony Starwood —  Blackstone Group  LP, the world’s largest private-equity firm, and self-storage magnate B. Wayne Hughes, who is behind American Homes.

Home Rental Goes Corporate

As the U.S. homeownership rate has declined, big investors have gotten into the business of buying single-family homes and offering them for rent.

On the first Tuesday of each month during the crisis, investors sent bidders to foreclosure auctions around Atlanta, where the foreclosure rate exceeded 3% in 2011, according to real-estate analytics firm  CoreLogic   Inc.  They toted duffels stuffed with millions of dollars in cashier’s checks made out in various denominations so they wouldn’t have to interrupt their buying sprees with trips to the bank, according to people who participated in the auctions.

Similar scenes played out in Phoenix, where the foreclosure rate hit 5% in late 2010, and in Las Vegas, where it nearly reached 10%.

The big investors accumulated tens of thousands of houses around those cities and others, including Dallas, Chicago and all over Florida, then got to work sprucing them up to rent. Often, renovations were major.  Invitation Homes Inc.,  the company  Blackstone created to manage its rental homes and took public in January , says it spent an average of $25,000 fixing up each of the foreclosed homes it bought.

A young resident of Spring Hill played ball last month on Cynthia Lane, a street with multiple rental properties.
A young resident of Spring Hill played ball last month on Cynthia Lane, a street with multiple rental properties.

The bulk-buying brought blighted properties back to life and helped speed the recovery of some of the regions hardest hit by the housing crisis. Executives at the investment firms say they offer homes in good school districts to families that may not be able to buy in those neighborhoods because of damaged credit and tighter postcrisis lending standards.

One of those firms,  Progress Residential, is owned by a private-equity firm formed by Donald Mullen Jr. , a former  Goldman Sachs Group   Inc.  mortgage chief who oversaw the bank’s lucrative bet against the housing market a decade ago. Progress now owns about 20,000 houses.

On a call with investors earlier this year, Mr. Mullen said Progress was betting that much of the middle class will have to rent if it wants to maintain the suburban lifestyle of the past. He said Progress offers “aspirational living experience” to tenants he described as typically about 38 years old and married, with a child or two, annual income of about $88,000, less-than-stellar FICO credit scores of 665 and $45,000 of debt. “Our residents are quite a ways away from being able to purchase a home,” he said.

Home prices in many markets are nearing their 2006 peaks, prompting some investors who bought homes during the downturn to flip them at a profit. But the big buy-to-rent investors are hanging on to their properties and looking to grow.

With fewer foreclosure properties available to buy, those firms have devised other ways to accumulate homes, including buying out rivals, building homes themselves, and buying properties one-by-one on the open market. They are focusing on places where they have gained scale through early foreclosure purchases, or around booming cities such as Nashville, Denver and Seattle.

Corporate buyers prefer easy-to-maintain newer homes in entry-level price ranges and in neighborhoods governed by homeowners associations.
Corporate buyers prefer easy-to-maintain newer homes in entry-level price ranges and in neighborhoods governed by homeowners associations.   PHOTO:  LUKE SHARRETT FOR THE WALL STREET JOURNAL

With family renters in mind, they rarely consider anything smaller than a three-bedroom. They prefer easy-to-maintain newer homes in  entry-level price ranges  and in neighborhoods governed by homeowners associations, which can help look after their properties. They often outfit their homes with the same appliances, fixtures and flooring so that their maintenance crews have parts on hand when they make house calls.

They have deep pockets and are dispassionate buyers, paying with cash and never fussing over the carpet or paint color.

Spring Hill is about an hour’s drive south of downtown Nashville. It has attracted investors for the same reasons families flock there. It boasts top-rated schools and has been adding jobs at one of the fastest clips in the country.

General Motors   Co.  kick-started the town’s growth in 1990 when it opened a vast plant for its now-defunct Saturn brand. The population has grown from about 1,500 back then to some 36,000 today, with subdivisions covering what had once been farmland.

American Homes arrived in 2012, the year after it was founded by Mr. Hughes, now 83 years old, who made billions in the self-storage business, and David Singelyn, who is the company’s chief executive. Mr. Hughes told  one of his earliest investors, Alaska’s state oil fund , that he imagined the sort of tenants he wanted—families with school-age children—and then went looking for suitable houses in good school districts.

Nashville’s foreclosure rate never exceeded 2%, so American Homes approached a local builder, John Maher, who had been renting unsold homes in his subdivisions. The company bought about 50 homes from him and later paid about $10 million for 42 rental homes in the area from local landlord Bruce McNeilage and his partners. Then it enlisted local brokers to find more.

Bruce McNeilage and his partners sold 42 rental homes around Nashville to American Homes 4 Rent.
Bruce McNeilage and his partners sold 42 rental homes around Nashville to American Homes 4 Rent.

Colony Starwood and Progress followed. The proliferation of rental homes spooked owners in some neighborhoods. A few subdivisions voted on whether cap the number of homes that could be rented, but the proposals failed.

“People want to sell their homes to the highest bidder, no matter who it is, and they want to be able to rent their home,” says Jamie Shipley, president of the Wakefield Homeowners Association, which governs a subdivision in which 11% of the homes are owned by institutional investors.

Soon after American Homes closed its deal with Mr. McNeilage, the local landlord, it increased rents on some of the properties by hundreds of dollars a month, according to Mr. McNeilage and some of his former tenants. “People who were on month-to-month leases got a real rude awakening,” he says.

American Homes, which owns more than 48,000 houses nationwide, controls nearly half of Spring Hill’s rental homes, leaving aggrieved renters limited choices. “If you want to be in that subdivision and have your kids go to that elementary school, you have to deal with them,” Mr. McNeilage says.

Jack Corrigan, American Homes’ operations chief, says rent increases for tenants renewing leases average 3% to 3.5%, and the company generally restricts larger hikes to new leases. “We try to be very reasonable with all of our tenants,” he says.

When Aaron Waldie moved to Spring Hill for a job in the finance department of a new hospital, he and his wife, Jessica, intended to use profits from selling their California home to buy a new house. Despite offering thousands of dollars above asking prices, the couple lost several bidding wars and settled for a rental owned by Colony Starwood. “It’s a lot more expensive than homeownership,” he said.

Aaron Waldie and his wife lost several bidding wars for homes in Spring Hill before settling for a rental.
Aaron Waldie and his wife lost several bidding wars for homes in Spring Hill before settling for a rental.

To assess how rents sought by Spring Hill’s big four corporate owners compare with the monthly costs of owning the same properties, The Wall Street Journal analyzed information from the companies’ marketing materials and county sales records for 27 homes purchased by the four since the beginning of March. The analysis—which assumed 10% down payments and 30-year fixed-rate mortgages, plus taxes and insurance—found the posted rents on those homes averaged 32% more than the monthly ownership cost.

The average rent for 148 single-family homes in Spring Hill owned by the big four landlords was about $1,773 a month, according to online listings since early May viewed by the Journal. Other landlords also have raised rents, local brokers say.

“The rent is crazy,” says Bruce Hull, Spring Hill’s vice mayor and owner of a local home-inspection business. “It hasn’t been that long since you could get a three bedroom, two bath for $1,000 a month.”

At a recent conference in New York, Mr. Singelyn, the American Homes CEO, told investors that the average household income declared by those applying to rent from American Homes had risen to $91,000, from $86,000 a year earlier.

“Their wherewithal to pay rent today as well as pay rent in the future, with increases, is sufficient,” he said. “It’s just up to us to educate tenants on a new way, that there will be annual rent increases. This has been a very passively managed industry for 30, 40 years up until institutional players came in.”

When rents are significantly higher than the cost of ownership,  renters tend to become house hunters. Builders who were sidelined during the recession are rushing to catch up to demand. Spring Hill issued more than 1,100 residential building permits for single-family homes since 2015, and over the past year its planning commission has rezoned and subdivided properties to accommodate thousands more, according to municipal records.

David Bowater, with his fiancée, Alexa Callanan, says rent increases on their townhouse in Spring Hill prompted them to buy a house in Columbia, Tenn.
David Bowater, with his fiancée, Alexa Callanan, says rent increases on their townhouse in Spring Hill prompted them to buy a house in Columbia, Tenn.

David Bowater and his fiancée were priced out of Spring Hill when the rent on their two-bedroom townhouse rose to about $1,100, from $875, over four years. “It’s cheaper to buy at this point,” Mr. Bowater says.

After bidding on six homes, they won the seventh. The house is even deeper into the middle Tennessee countryside and farther from the restaurants where they work. Mr. Bowater says it is costing him about $100 a month more to own the home than he was paying in rent on the townhouse, but that it is far cheaper than it would be to rent a comparable home with a yard.

“We had to make a big offer,” he said. “I just hope the bubble doesn’t burst and our loan goes upside down.”

Write to  Ryan Dezember at  ryan.dezember@wsj.com  and Laura Kusisto at  laura.kusisto@wsj.com

By Bruce McNeilage 14 Dec, 2023
In my interview with Seana Smith & Brad Smith from Yahoo Finance today we discussed single-familiy rental rates and my thoughts on mortgage rates going into 2024.
By Bruce McNeilage 14 Dec, 2023
Owner's equivalent rental prices rose 0.5% in November , a pervasive factor in US inflation as limited housing inventory continues to squeeze homebuyers out of tightened real estate markets. Kinloch Partners CEO Bruce McNeilage joins Yahoo Finance Live to weigh in on the outlook for renters and home purchases in 2024. Home prices are "not going to go down, that's for sure. And mortgage rates might go down, but if the cost of a house goes up $10-20,000, it's a wash," McNeilage states. For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live. 
By Bruce McNeilage 08 Nov, 2023
Original Story can be found here: https://www.tennessean.com/story/money/real-estate/2023/11/08/renters-seek-new-options-in-nashvilles-tight-housing-market/70652968007/ Charlene and Timothy Stratton traded in their 4-acre Illinois ranch for a rental home in the Nashville suburb of Spring Hill and, so far, they love the new low-maintenance lifestyle. Like a growing contingent of Americans, they chose to rent a single-family house rather than buy a home or rent in multifamily apartment buildings. "We lived in the country all of our lives with horses and cows," said Timothy Stratton, a retired airline mechanic. "But we wanted to rent because we’re looking at our age. We did a lot of research and decided this will work out for the time being." Families like the Strattons increasingly want the mobility and limited commitment of a rental, with the privacy and space of a single-family home. Meanwhile, many families are also being pushed out of the tight housing market. Housing affordability plummeted to historic lows this year, with only 23% of U.S. listings in April considered affordable to households earning $75,000 or less, according to the National Association of Realtors. In response, real estate investors are betting heavily on new rental properties and, increasingly, on standalone units — especially in the South. More than 61,000 fully and semi-detached single-family rental units are under construction in Southern states as of September. In comparison, 28,000 units are in production in the Western U.S., the next-busiest region, according to RealPage Market Analytics. Those units include single-family homes, townhomes, rowhomes, quadruplexes and duplexes. Single-family rental communities are increasingly concentrated in subdivisions with on-site maintenance, rather than in homes nestled in for-sale housing neighborhoods. The Nashville market has the ninth-highest number of in-construction, build-to-rent homes with 2,745 units in the pipeline. Phoenix tops the list with 21,676 units underway, a RealPage analysis in August found. "Construction isn't going fast enough in Nashville. If they built four or five new build-to-rent communities, they would fill them up immediately," said Doug Ressler, the business intelligence director of Yardi Matrix, a real estate data firm. "We really expect Nashville to continue to see growth here." Rent vs. own: 'More house for your money' Charlene Stratton filled the three-bedroom house with festive seasonal crafts and artwork she creates in her home studio. Renting isn't perfect, but there are real perks — like, when the air conditioner stalled on a Saturday afternoon in the middle of summer, the landlord offered to put them in a hotel until maintenance could fix it that Monday. "When something goes wrong, we just call them," Charlene Stratton said. "It's great." The Strattons live at DerryBerry Estates, one of the first of its kind, built in 2019 by Kinloch Parners. The 34-home community sits on former pastures with views of Spring Hill's rolling green landscape and rose bushes in the front yard. Local development companies like Kinloch Partners of Nashville and Franklin-based Chartwell Residential and Barlow Builders have made stakes in the industry. "In 2008, I had no competition. Now there are six or seven players in the market," said Kinloch Partners Co-founder Bruce McNeilage, who sold much of his inventory to American Homes 4 Rent and expanded to South Carolina. "We're 99% leased out." McNeilage said he prioritizes creating a calm, supportive community with competitive prices. Rents at DerryBerry Estates ranged from $2,300 to $2,600 for homes with three to five bedrooms in September. "People are starting families later in life and COVID-19 has allowed people to work out of their houses so people are moving farther out," McNeilage added. "Housing prices are going up and interest prices just doubled. You can get more house for your money if you get farther out." Housing in Nashville area: 'Can't build them fast enough' Chartwell Residential, a local real estate firm specializing in multifamily apartments, is now building out its first single-family rental home community. https://www.tennessean.com/story/money/real-estate/2023/11/08/renters-seek-new-options-in-nashvilles-tight-housing-market/70652968007/ https://www.tennessean.com/story/money/real-estate/2023/11/08/renters-seek-new-options-in-nashvilles-tight-housing-market/70652968007/ https://www.tennessean.com/story/money/real-estate/2023/11/08/renters-seek-new-options-in-nashvilles-tight-housing-market/70652968007/ https://www.tennessean.com/story/money/real-estate/2023/11/08/renters-seek-new-options-in-nashvilles-tight-housing-market/70652968007/ https://www.tennessean.com/story/money/real-estate/2023/11/08/renters-seek-new-options-in-nashvilles-tight-housing-market/70652968007/ https://www.tennessean.com/story/money/real-estate/2023/11/08/renters-seek-new-options-in-nashvilles-tight-housing-market/70652968007/
By Bruce McNeilage 15 Jul, 2023
NASHVILLE, Tenn. (WKRN) — High prices and high-interest rates have kept many from buying a single-family home in a quiet suburban neighborhood. But what if you could rent one? Developers say they are seeing a big demand for build-to-rent communities. Upon first glance at the DerryBerry Estates subdivision, you might assume the single-family homes are for sale, but they are not—each one is a rental. “People are very happy with what we are providing,” said Bruce McNeilage, CEO/co-founder, Kinloch Partners. Bruce McNeilage built DerryBerry Estates in Spring Hill a few years ago. He saw some families struggling to afford a single-family home in the suburbs, but still craving that lifestyle. “Their kids are getting older, they want to be in good schools, you want to ride a bike around, and you just can’t do that in an apartment complex.” No sharing walls at DerryBerry Estates, or Fairview Station, the other rental home community Kinloch Partners built in western Williamson County. DerryBerry Estates subdivision has 41 single-family homes with 3 and 4 bedrooms and rents in the $2,300 to $2,500 range; and all the trappings of the suburban lifestyle. “They have front porches, they have covered back porches, two-car garage. They have all the amenities and appointments on the interior that one would want in a house for sale, but these are available for rent.” Who would be interested in an all-rental community? McNeilage said his tenants are often folks new to town testing out the neighborhood, young families who can’t afford just yet to buy, those looking for a low-maintenance lifestyle, and senior citizens, which make up 10% of his tenants. “They don’t want to live in an apartment and share walls with someone. They want to live in a single-family home in the suburbs to probably be real close to their grandchildren.” McNeilage has a couple of rental communities in Middle Tennessee, as well as out of state. And with housing prices staying high, he sees the popularity of rental communities sticking around “I could build 100 houses. I could build another 100 houses. I really have a demand that I can’t keep up with.” McNeilage said that his tenant turnover is lower than an apartment complex. People will stay in his homes 3-4 years on average, but for apartment complexes, it’s 1.5 years. 
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