One Percent’s Rental Nightmare: How Wall Street's Scheme Blew Up in Its Face

[xchrom]

http://www.alternet.org/economy/one-percents-rental-nightmare-how-wall-streets-scheme-blew-its-face



I’ve followed the Wall Street rental scheme for some time. You know the basics by now: Big Money investors decided to buy up all the foreclosed properties their pals at the banks created during the financial crisis, and rent them out to many of the same people who lost their homes. Then, they started selling securities backed by the rental revenue, just like the mortgage-backed securities from the crisis. Profiting off their own failure: It was Wall Street’s perfect plan.

There was just one problem: turns out that institutional investors have no idea how to manage rental properties.

That has become clear through a series of new statistics from early investors, who regarded themselves as the trailblazers of a hot new asset class. For example, nobody has purchased more properties and converted them into rentals than Blackstone, holders of roughly 45,000 nationwide. Invitation Homes, a Blackstone subsidiary, issued the first rental-backed security last November, and just released its first of this year, 2014-SFR1, worth $1 billion and based on 6,537 properties in selected markets, including Phoenix, Atlanta, Sacramento, California, several parts of Florida and Riverside County, California. Yet while these areas have tight housing inventory, vacancies at the Invitation Homes properties have surged.

As of May 31, the vacancy rate for the homes in 2014-SFR1 stood at 7.3 percent, a 33 percent increase over the previous month. It’s not a fluke: Vacancy rates for Invitation Homes’ initial rental-backed security from last year have spiked to a higher-than-expected 8.3 percent.

[djean111]

1. Aw, someone forgot that people with no jobs and people with shit jobs, and people

with no reason to feel like they have job security are not going to pay premium rent prices.
Also I hope that the higher fines for more stringent HOA rules, and higher HOA dues that they were fighting for here in Florida will bite them in the ass.

Wonder what the bail-out will look like this time....because they WILL be bailed out.

[BrotherIvan]

2. And they hire people to pose as buyers because they know that no one wants to sell to them

The one instruction I gave our realtor when I sold my mother's home was no investment buyers. We had two couples come and pose as real people. Just a few questions and their stories fell apart. Luckily, the city where she lived, it is a seller's markets and we didn't have to sell to those scumbags.

[starroute]

3. They didn't realize that being a landlord is hard work

People think that owning houses is easy money. You buy a few, the rents just roll in, and eventually you flip them at a profit. They don't realize that houses have to be maintained -- and that an absentee landlord is in the worst possible position to do that. Major system wear out, or pipes freeze and flood the place, or tenants just trash stuff and do more damage than their deposit will cover.

The standard guideline is that you should expect to spend 1-4% of a house's value each year on maintenance -- more on older houses -- and that's in addition to taxes and insurance. And the standard figure for what a house might rent for is 5-6% of its value annually.

In other words, anyone who rents out a single house will be lucky if they do much more than break even, not even counting their own overhead and what they paid for it. And if they want to sell some day at a profit, both the house and the rest of the neighborhood can't be allowed to decay. That's a tall order.

Apartment buildings or complexes aren't as difficult. They're usually big enough to have a handyman on call. There isn't as much that can go wrong -- partly because there's a lot less roof and outside walls proportional to the number of units. Neighbors are more likely to say something if one tenant is obviously bad news. But renting out single-family homes can be a nightmare.

[Blanks]

4. You've got that right...

You don't own a house - it owns you. Whether your renting it or living in it.

[sendero]

7. I must be a genius..

.... because I do WAY better than breaking even.

I won't be gauche and talk real numbers but each of my houses brings me an income well worth the minimal time I put into them.

But, there are things you have to do right, you have to rent well-maintained properties and you have to be very selective who you rent to, in fact the entire key to your success will be your selection of tenants.

And the property managers these big companies hire will act like every property manager out there, a warm body with a check that clears is all it takes to qualify a tenant. That is their downfall, the only person with a vested interest in doing things right, particularly in the selection of a well-qualified tenant, is the owner.

[laundry_queen]

10. It depends on the market

In my area, so many people are starting to do it for easy income. Basically, there are a shortage of houses to rent, a transient population that is here for work and the work pays really well. If I had enough money I'd buy one of the duplexes on my street to rent out. Most of them are rentals. However, if someone lives in a market with a glut of houses and high unemployment, they might not be able to make any income on the rentals. It can still be worth it though, because you gain the equity in the rental property (so long as the market doesn't tank again, you have to be in it for the long term).

I agree with you about tenant selection (although some are too picky - I got a deposit returned because the landlord found someone 'better'...I had a feeling he didn't like that I had 4 kids. Bummer for him, my next landlord was so sad to see me go, he said I was the best tenant he had ever had and couldn't believe how pristine the house was) if you are going to allow just anyone and not check up on them, you are going to end up with some bad experiences.

[sendero]

14. I wouldn't exactly call it "easy"..

... income but as of right now it looks to me to be the only way to make some return on your money with some degree of safety. I wouldn't touch the rigged stock market with a 10 foot pole, fool me once and all that, and fixed income "investments" are paying 1.5% at best. I make 15% annual return on my money with rentals, and that counts only cash flow, never mind someone else is paying my mortgage, the possibility (no guarantee but a definite possibility) of rising prices/equity.

In any event I am lucky to be in a smaller town when the hedge fund vultures haven't visited, I have friends in the Dallas area who cannot find viable properties any more because of them. And I expect these mass ventures into rental properties by these clueless people to end in tears for them and/or their investors.

[laundry_queen]

15. I should've clarified. *I* don't think it's easy

just tons of people I know who are trying to get into it think so.

I agree with the rest of your post, it can be a very good investment under the right circumstances. I'm in Canada so not as many hedge fund vultures here. Yet.

[glowing]

5. Sure would be nice if congress acted in front of a problem; rather than react in crisis mode!

[KrazyinKS]

6. When the housing market fell apart-

The talking heads on TV were encouraging people to just rent. I thought what? We bought a small house 30 years ago, its paid for, small so low taxes and such. I don't know where I would be if I were trying to rent right now. I was wondering why they kept saying that, to rent instead of buying.

[EEO]

8. That's a shame.

[Spitfire of ATJ]

9. On the plus side a lot of poor areas got granite coutertops.

[kimbutgar]

11. I worked for a rich guy who he and his rich buddies brought up foreclosures in Fresno

Before I left I overheard him talking to a fellow investor and they couldn't find renters because they made the rents too high for people to afford them.And there are a lot of poor people in Fresno.

I hope he is choking on his losses.

[Roy Rolling]

12. It's the Business Plan of the Underpants Gnomes

1. Force people from their homes and buy up the foreclosed properties to rent

2. ?

3. Profit

[bemildred]

13. A dumb idea badly carried out. nt