Many Americans have often seen rental property as a viable investment to earn predictable long-term positive cash flows and capital appreciation. Once properties are established, they can provide a relatively passive income stream. But they also come with a great risk, the hassle of being a landlord and a loss of liquidity.
Now a new breed of real estate investment trusts are rapidly acquiring single-family homes at low prices and turning them into rentals. They may offer investors a way to capitalize on the booming rental market with limited risk, lower costs and more liquidity.
Brad Case, senior vice president of research and industry information for the National Association of Real Estate Investment Trusts, says many people overestimate the benefits of rental property. “For most people who buy a (rental) house around the corner, it’s not that great of an investment,” he says. “You end up spending a lot of time and money that you don’t think about.”
The biggest downside is the lack of diversification. Most investors can only afford to buy one or two properties in their own community. Michael Missaghie, portfolio manager for Sentry Investments in Toronto, says new REITs coming on the market now allow investors to invest in a large pool of thousands of single-family rental homes across the country. They can offer wide geographic and tenant diversification, professional management and greater leverage and buying power to purchase properties.
“It provides you with professional management, diversification and a wide portfolio of single family rental properties that few ordinary individuals would be able to replicate,” says Missaghie.
Capitalizing on the large number of “distressed” houses on the market, these REITs typically buy single-family homes, often unsold bank-owned (also called REO, real estate owned), then quickly put them back on the market as rentals. The REITs usually buy the homes at up to a 40% discount to new construction costs and much like any investor, they aim to achieve long-term capital appreciation along with a monthly rental stream.
Colony Financial (CLNY), Altisource Residential (RESI) and Silver Bay Realty Trust (SBY) are the only publicly traded REITs in this field now, but more REITs are expected to come on the market in coming years.