Is the “Buy to Rent” Party Over?

For well over a year now, I have been writing about how this whole “buy to rent” investment strategy is one of the biggest disasters waiting to happen within the U.S. economy.  I have repeatedly noted that these private equity clowns were crowding into these markets with reckless abandon and that this would ultimately crush their business model as there’s no way rents can rise enough to keep yields attractive in a country where most people are struggling to meet their daily expenses.  Well it seems the day of reckoning may be at hand.  From Bloomberg:

Rents for single-family homes are rising slower than property prices as firms such as Blackstone Group LP (BX) flood the market with homes for lease, posing risks to investors betting billions on the burgeoning market.

Monthly payments for properties in Phoenix rose 1.3 percent in February from a year earlier, compared with a 25 percent jump in for-sale asking prices, according to Trulia Inc. (TRLA), which operates an online listing service. In Atlanta, asking prices climbed 14 percent as single family rents gained 0.5 percent, and in Las Vegas rents dropped 1.7 percent even as asking prices soared 18 percent.

Seems like a fantastic business model…

“Investors are buying homes, in part, to rent them out, and that has added a lot of rental supply, and that’s preventing rents from rising,” Jed Kolko, San Francisco-based Trulia’s chief economist, said in a telephone interview. “It means some investors will start to think about selling those single-family rentals.”

“They’re effectively pushing prices up on each other,” Chang, a former Morgan Stanley housing analyst, said in a telephone interview.

Tina Africk, a Las Vegas broker who manages 60 single- family home rentals, said houses that might have rented in 30 days in the past can now take 60 to 90 days to fill, while rents have dropped about $100 a month from a year ago.

“What we’re seeing is a game of musical chairs,” Wilcox said. “People lose homes to foreclosure and then rent a single- family home from an investor while another investor buys the foreclosure they just left.”

That folks is the U.S. economy in 2013.

Orr estimated that large investors bought 8 percent of the Phoenix-area homes sold last year, peaking in July and August before tapering off as prices rose. Purchases by all investors dropped to almost 32 percent of transactions in January from more than 39 percent a year earlier, he said.

So almost half the housing market in Phoenix consisted of investors.  Sorry, that’s downright terrifying.

“One of the risks is prices run up and therefore the rental economics don’t justify the business model,” Rahmani, who has an outperform rating on Silver Bay and Colony, the equivalent of a buy recommendation, said in a telephone interview from New York. “The problem could be that you would have assets that are up a lot in value, which isn’t the worst thing in the world. The risk would be that everybody goes to sell at the same time.”

No Rahmani, all you need is for prices to rise to the point the entire business model is dead and then people stop buying.  You don’t even need to see rampant selling.  If the buying dries up, the housing market will totally crash once again.

Monthly leases in Phoenix’s west side, where investors bought the most rentals, fell by about $100 a month, or 10 percent, in 2012, said James Breitenstein, CEO of Landsmith, a San Francisco-based single-family rental firm that sold most of its 250 Phoenix rental houses last year.

“There are a lot of properties out there, so the competition to get your property rented is fierce,” Svoboda said. “Tenants are very savvy. If you’re overpriced by $25, they’ll let you know and go to another one around the corner.”

The buy to rent strategy could very well down down as one of the most idiotic investment trends in years, and that’s saying a lot.

Full article here.

In Liberty,
Mike

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