New Hedge-Fund Landlords Learning the Price of Hubris

Courtesy of Russ Winter of Winter Watch at Wall Street Examiner

Four minute podcast : Capital fund Och-Ziff Checks Out of Rental Housing (see Reuters article).


Those who have been paying attention to my posts know I’ve been predicting that capital investment funds would have huge difficulties in new ventures as landlords. Ad nauseum, I’ve said that landlording is a tough business, even in economies and neighborhoods with signs of improvement, such as Tacoma where I was involved in vintage apartments between 1997 and 2003. To think that anyone today could pick up foreclosed houses, pour tens of thousands of dollars into them, rent them out to the impoverished masses with a squatter mentality and make out like a bandit is the ultimate in hubris.

Reuters is reporting that the firm Och-Ziff has decided to unload a 300-house portfolio in California because “the returns it is generating from rental income are less than expected and it is looking to take advantage of a recent rebound in homes in northern California.” The firm only bought the foreclosures a year ago. So much for the theory of disappearing shadow inventory.

Reuters report: “Earlier this year, proponents of investing in foreclosed homes were projecting a return of at least 8 percent a year from renting them out. Och-Ziff’s move could indicate that institutional investors may have to dial back their expectations, especially with regard to rental income…’It’s not surprising that some investors may have overestimated rental returns,’ said Rick Sharga, executive vice president with Carrington Mortgage Holdings, a division of Carrington Capital, which has been buying and renting foreclosed homes 2007. ‘If you are an investor getting into this cold you were probably making assumptions based on models rather than experience.’”

Wall Street analysts estimate that this year alone, private equity firms, hedge funds and other investment firms have raised between $6 billion and $8 billion to acquire single-family homes at either foreclosure auctions or from banks. So far, private equity giant Blackstone has emerged as one of the biggest buyers, spending more than $1 billion to gobble up foreclosed homes. I submit that these firms can’t make money on these even with extremely low-cost borrowing.

As far as the underlying fundamentals of housing go, 25 to 35-year-old cohorts in particular are simply not in place to create a sustainable upturn in housing. This is especially the case given consumer liquidity remains severely impaired by high unemployment, stagnant wages and negative real-income growth. Plus, the First Time Homebuyer credit program between 2008 and 2010 pulled forward demand among this group, leaving the Och-Ziffs of the world as the buyers turned sellers, or flippers. This potential pullback in investor demand and the return of supply to the market threatens to cut the nascent housing recovery off at the pass.

Charts discussed in this podcast.


source: Sober Look

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