Single-family rental's star rises as REO deals abound

Source: Wall Street Journal
By Nick Timiraos

A San Francisco-based company that buys foreclosed homes and rents them out is finding that the stampede of private cash into the nascent single-family rental sector is changing its business plan: it’s already cashing out. Landsmith L.P., which has amassed a portfolio of more than 250 occupied rentals in Phoenix, said Tuesday it has sold a package of 75 homes to an undisclosed institutional investor for $7.5 million, a substantial markup from the $5.3 million, before management and renovation costs, that the company paid to acquire the homes over the past year. Landsmith buys foreclosed homes either in courthouse auctions or through normal retail listings. Its plan is still to hold onto the homes for five years or so. “But if people are willing to pay a price that lets us realize an upfront return, we don’t need to wait,” says James Breitenstein, the firm’s chief executive. “The potential for this asset class is being realized sooner than we thought.” Eager to jump into the sector, investors such as Oaktree Capital Management and Colony Capital have raised hundreds of millions for the task. But with few bulk sales from banks and mortgage investors Fannie Mae and Freddie Mac, the market has been dominated by smaller outfits like Landsmith that buy homes one at a time. The emergence of a secondary market for single-family rentals shows how larger investors may be more willing to accept more modest returns than the smaller companies that are demanding bigger yields. Those firms face high upfront costs from scaling up an acquisition and property management infrastructure. Phoenix has been ground zero for the hold-and-rent strategy over the past year because the market had an abundance of cheap, recently constructed housing and a better job market. Investor demand has helped ignite a rally in Phoenix home prices and has sent Landsmith and other firms in search of the next gold rush market. Landsmith, a privately held real estate investment trust, says it’s now entering five more markets and that it plans to expand into 10 by the end of 2013. The firm is looking to raise capital from institutional investors and pension funds to finance that next expansion.

URL to original article: http://www.builderonline.com/builder-pulse/single-family-rental-s-star-rises-as-reo-deals-abound.aspx?cid=BP:061312:JUMP

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