A new breed of real estate investment trusts have taken advantage of the recent surge in foreclosures by rapidly acquiring single-family homes at low prices and turning them into rentals. They may offer investors a great way to capitalize on the booming rental market while doing so with limited risk, lower costs and more liquidity.
Rental property can be a great way to build long-term wealth, but it also comes with great risk and high barriers to entry. This investment often isn’t as passive as one would think. First and foremost is the down payment or upfront costs, which can run into the tens of thousands of dollars, even more in high-priced housing markets. Then there are hefty expenses such as property taxes and insurance. Finally, there’s the hassle of being a landlord, which can be a big drag on time and resources.
Brad Case, senior vice president of research and industry information for the Washington, D.C.-based 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,” Case 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. With such a small spread, there’s tremendous risk because a bad tenant, broken lease or natural disaster can instantly end the entire revenue stream.
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 United States. 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,” Missaghie says.
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 percent discount to new construction costs and much like any investor, they aim to achieve long-term capital appreciation along with a monthly rental stream.