Sunday, February 24, 2013

Housing: Some Details on the Business Model for Institutional Buyers

by Bill McBride on 2/24/2013 10:23:00 AM

Some interesting details on institutional buyers from the Newsobserver.com: California billionaire bets on rentals with Wake home-buying spree (ht Sebastian)

[C]ompanies have raised billions from pension funds, private equity firms and other institutional investors to fuel their buying sprees. To date, these companies have focused their attention mainly on markets with large inventories of distressed homes, particularly in Arizona, Florida, Nevada and California.

What’s noteworthy about American Homes 4 Rent’s buying binge in Wake County [North Carolina] is that it isn’t just targeting distressed properties, or even existing homes. About a third of its purchases have been new homes acquired directly from homebuilders.
...
Institutional investors have invested at least $5.4 billion for purchase of single-family rentals nationwide during the past 18 months, according to Barclays, and an additional $8 billion is expected to be invested within the next couple of years. American Homes 4 Rent’s buying spree is being financed in part by a $600 million investment from the Alaska Permanent Fund, a $45 billion fund that invests royalties the state collects from oil companies.

American Homes 4 Rent is targeting homes with about 2,000 square feet that are less than 15 years old and are located in neighborhoods with better-than-average schools. The company paid around $65 to $75 per square foot for the first 1,500 homes it acquired, according to the meeting minutes, and it expects vacancy rates of 5 percent or less in its portfolio.

American Homes 4 Rent hopes to charge monthly rents equal to about 1 percent of the purchase price, and provide returns of about 6.5 percent a year to the Alaska Permanent Fund, according to the board’s meeting minutes. In three to seven years, if the housing market recovers, the portfolio could be sold or be converted into a publicly traded real estate investment trust ...
emphasis added
There is much more in the article. It is interesting that the institutional investors are moving beyond distressed properties, and even buying new homes in some areas.

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