Foreclosure to Rental

It’s no secret by now that high dollar investment firms have been buying up a significant fraction of low end real estate in the United States. Just the foreclosure to rental market alone this year is expected to be a $100 BILLION industry. That doesn’t include short sale or conventional sale to rental market.

Companies like Waypoint (Oakland based) are buying up property all over CA and currently owns over 1800 homes. Blackstone (NY based) is buying about 40 houses per week in the greater Sacramento area.

Low end real estate investment is currently more attractive to many compared to the stock market, CDs, or commodity/materials/currency investment due to greater ROI. For example, there are no shortage of zip codes in the Bay Area that have 7%, 8%, 9% or even larger annual rent:price ratios. And because these investment firms are typically coming with cash and they have very good relationship with realtors and banks due to a reputation of closing very quickly without hick-ups, they are getting first crack at anything worthwhile. Several points:

– This will surely continue for low end real estate as long as it remains significantly cheaper to buy than to rent. With the real estate market surge that we’ve seen in 2012, it’s not quite as attractive to get in this game as it was in 2010-2011 for instance, but it’s still difficult to find a better place to put your money today. If the market continues to rise (and rents don’t), eventually we’ll hit a threshold where it no longer makes sense and the bulk rental investments that we are seeing will cool off.

– How are new families/first time buyers who are needing to finance going to compete with these firms that are bringing cash and already have everyone involved in the home buying process on their side in terms of relationship?

– Most importantly, what will be the short and long term implications of entire neighborhoods in Pittsburg, Vallejo, Bay Point, Antioch, and Concord for example being owned by none owner occupied investment firms and/or private investors? I’ve thought about this a lot while hunting for my own investment properties as owner occupancy continues to drop in the low end real estate market.

In general, high owner occupied neighborhoods are attractive to new buyers/renters. At the same time, it’s in the interest of the landlord to upkeep his/her property to keep vacancy rate low and rental price as high as possible.

As investor owned homes continue to increase in low end areas, this will give landlords more control over rental prices, but of course it will also introduce more landlords which will increase their own competition (unless the same firm owns all/most of the homes within the neighborhood). I guess ultimately the market (supply/demand) will have the greatest influence in what landlords can charge for rent and the rental price swings from other factors will be small in comparison.

Maybe I am over thinking this a bit, but you have to stop and think for a second that we’ve never in the history of real estate had this rate of single family homes being bought for rental purposes like we are seeing today. There obviously will be implications for the Property Preservation Industry.

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