By Ryan Dezember and Laura Kusisto | Photographs by Luke Sharret for The Wall Street Journal
SPRING HILL, Tenn. -- When real-estate agent Don Nugent listed a
three-bedroom, two-bath house here on Jo Ann Drive, offers came
immediately, including a $208,000 one from a couple with a young
child looking for their first home.
A competing bid was too attractive to pass up. American Homes 4
Rent, a public company that had been scooping up homes in the
neighborhood, offered the same amount -- but all cash, no
inspection required.
Twelve hours after the house went on the market in April, the
Agoura Hills, Calif.-based real-estate investment trust signed a
contract. About a month later, it put the house back on the market,
this time for rent, for $1,575 a month.
A new breed of homeowners has arrived in this middle-class
suburb of Nashville and in many other communities around the
country: big investment firms in the business of offering
single-family homes for rent. Their appearance has shaken up sales
and rental markets and, in some neighborhoods, sparked rent
increases.
On Jo Anne Drive alone, American Homes 4 Rent owns seven homes,
property records indicate. In all of Spring Hill, four firms --
American Homes, Colony Starwood Homes, Progress Residential and
Streetlane Homes -- own nearly 700 houses, according to tax rolls.
That amounts to about 5% of all the houses in town, a 2016 census
indicates, and roughly three-quarters of those available for rent,
according to Lisa Wurth, president of the local Realtors'
association.
Those four companies and others like them have become big
landlords in other Nashville suburbs, and in neighborhoods outside
Atlanta, Phoenix and a couple dozen other metropolitan areas. All
told, big investors have spent some $40 billion buying about
200,000 houses, renovating them and building rental-management
businesses, estimates real-estate research firm Green Street
Advisors LLC. Still, they own less than 2% of all U.S. rental
homes, according to Green Street.
The buying spree amounts to a huge bet that the homeownership
rate, which currently is hovering around a five-decade low, will
stay low and that rents will continue to rise. The investors also
are wagering that many people no longer see owning a home as an
essential part of the American dream.
"The rental stigma has really subsided," says Michael Cook,
operations chief at closely held Streetlane Homes, which owns about
4,000 houses. "People are realizing that houses are not necessarily
the best places to store wealth."
For many years, the rental-home business was dominated by small
businesses and mom-and-pop investors, most of whom owned just a
property or two. Big investment firms concentrated on other
real-estate sectors -- apartment buildings, office towers, shopping
centers and warehouses -- reasoning that single-family homes were
too difficult to acquire en masse and unwieldy to manage and
maintain.
That all began to change during the financial crisis a decade
ago. Swaths of suburbia were sold on courthouse steps after
millions of Americans defaulted on mortgages. Veteran real-estate
investors raced to buy tens of thousands of deeply discounted
houses, often sight unseen. The big buyers included investors
Thomas Barrack Jr. and Barry Sternlicht -- who later merged their
rental-home holdings to create Colony Starwood -- Blackstone Group
LP, the world's largest private-equity firm, and self-storage
magnate B. Wayne Hughes, who is behind American Homes.
On the first Tuesday of each month during the crisis, investors
sent bidders to foreclosure auctions around Atlanta, where the
foreclosure rate exceeded 3% in 2011, according to real-estate
analytics firm CoreLogic Inc. They toted duffels stuffed with
millions of dollars in cashier's checks made out in various
denominations so they wouldn't have to interrupt their buying
sprees with trips to the bank, according to people who participated
in the auctions.
Similar scenes played out in Phoenix, where the foreclosure rate
hit 5% in late 2010, and in Las Vegas, where it nearly reached
10%.
The big investors accumulated tens of thousands of houses around
those cities and others, including Dallas, Chicago and all over
Florida, then got to work sprucing them up to rent. Often,
renovations were major. Invitation Homes Inc., the company
Blackstone created to manage its rental homes and took public in
January, says it spent an average of $25,000 fixing up each of the
foreclosed homes it bought.
The bulk-buying brought blighted properties back to life and
helped speed the recovery of some of the regions hardest hit by the
housing crisis. Executives at the investment firms say they offer
homes in good school districts to families that may not be able to
buy in those neighborhoods because of damaged credit and tighter
postcrisis lending standards.
One of those firms, Progress Residential, is owned by a
private-equity firm formed by Donald Mullen Jr., a former Goldman
Sachs Group Inc. mortgage chief who oversaw the bank's lucrative
bet against the housing market a decade ago. Progress now owns
about 20,000 houses.
On a call with investors earlier this year, Mr. Mullen said
Progress was betting that much of the middle class will have to
rent if it wants to maintain the suburban lifestyle of the past. He
said Progress offers "aspirational living experience" to tenants he
described as typically about 38 years old and married, with a child
or two, annual income of about $88,000, less-than-stellar FICO
credit scores of 665 and $45,000 of debt. "Our residents are quite
a ways away from being able to purchase a home," he said.
Home prices in many markets are nearing their 2006 peaks,
prompting some investors who bought homes during the downturn to
flip them at a profit. But the big buy-to-rent investors are
hanging on to their properties and looking to grow.
With fewer foreclosure properties available to buy, those firms
have devised other ways to accumulate homes, including buying out
rivals, building homes themselves, and buying properties one-by-one
on the open market. They are focusing on places where they have
gained scale through early foreclosure purchases, or around booming
cities such as Nashville, Denver and Seattle.
With family renters in mind, they rarely consider anything
smaller than a three-bedroom. They prefer easy-to-maintain newer
homes in entry-level price ranges and in neighborhoods governed by
homeowners associations, which can help look after their
properties. They often outfit their homes with the same appliances,
fixtures and flooring so that their maintenance crews have parts on
hand when they make house calls.
They have deep pockets and are dispassionate buyers, paying with
cash and never fussing over the carpet or paint color.
Spring Hill is about an hour's drive south of downtown
Nashville. It has attracted investors for the same reasons families
flock there. It boasts top-rated schools and has been adding jobs
at one of the fastest clips in the country.
General Motors Co. kick-started the town's growth in 1990 when
it opened a vast plant for its now-defunct Saturn brand. The
population has grown from about 1,500 back then to some 36,000
today, with subdivisions covering what had once been farmland.
American Homes arrived in 2012, the year after it was founded by
Mr. Hughes, now 83 years old, who made billions in the self-storage
business, and David Singelyn, who is the company's chief executive.
Mr. Hughes told one of his earliest investors, Alaska's state oil
fund, that he imagined the sort of tenants he wanted -- families
with school-age children -- and then went looking for suitable
houses in good school districts.
Nashville's foreclosure rate never exceeded 2%, so American
Homes approached a local builder, John Maher, who had been renting
unsold homes in his subdivisions. The company bought about 50 homes
from him and later paid about $10 million for 42 rental homes in
the area from local landlord Bruce McNeilage and his partners. Then
it enlisted local brokers to find more.
Colony Starwood and Progress followed. The proliferation of
rental homes spooked owners in some neighborhoods. A few
subdivisions voted on whether cap the number of homes that could be
rented, but the proposals failed.
"People want to sell their homes to the highest bidder, no
matter who it is, and they want to be able to rent their home,"
says Jamie Shipley, president of the Wakefield Homeowners
Association, which governs a subdivision in which 11% of the homes
are owned by institutional investors.
Soon after American Homes closed its deal with Mr. McNeilage,
the local landlord, it increased rents on some of the properties by
hundreds of dollars a month, according to Mr. McNeilage and some of
his former tenants. "People who were on month-to-month leases got a
real rude awakening," he says.
American Homes, which owns more than 48,000 houses nationwide,
controls nearly half of Spring Hill's rental homes, leaving
aggrieved renters limited choices. "If you want to be in that
subdivision and have your kids go to that elementary school, you
have to deal with them," Mr. McNeilage says.
Jack Corrigan, American Homes' operations chief, says rent
increases for tenants renewing leases average 3% to 3.5%, and the
company generally restricts larger hikes to new leases. "We try to
be very reasonable with all of our tenants," he says.
When Aaron Waldie moved to Spring Hill for a job in the finance
department of a new hospital, he and his wife, Jessica, intended to
use profits from selling their California home to buy a new house.
Despite offering thousands of dollars above asking prices, the
couple lost several bidding wars and settled for a rental owned by
Colony Starwood. "It's a lot more expensive than homeownership," he
said.
To assess how rents sought by Spring Hill's big four corporate
owners compare with the monthly costs of owning the same
properties, The Wall Street Journal analyzed information from the
companies' marketing materials and county sales records for 27
homes purchased by the four since the beginning of March. The
analysis -- which assumed 10% down payments and 30-year fixed-rate
mortgages, plus taxes and insurance -- found the posted rents on
those homes averaged 32% more than the monthly ownership cost.
The average rent for 148 single-family homes in Spring Hill
owned by the big four landlords was about $1,773 a month, according
to online listings since early May viewed by the Journal. Other
landlords also have raised rents, local brokers say.
"The rent is crazy," says Bruce Hull, Spring Hill's vice mayor
and owner of a local home-inspection business. "It hasn't been that
long since you could get a three bedroom, two bath for $1,000 a
month."
At a recent conference in New York, Mr. Singelyn, the American
Homes CEO, told investors that the average household income
declared by those applying to rent from American Homes had risen to
$91,000, from $86,000 a year earlier.
"Their wherewithal to pay rent today as well as pay rent in the
future, with increases, is sufficient," he said. "It's just up to
us to educate tenants on a new way, that there will be annual rent
increases. This has been a very passively managed industry for 30,
40 years up until institutional players came in."
When rents are significantly higher than the cost of ownership,
renters tend to become house hunters. Builders who were sidelined
during the recession are rushing to catch up to demand. Spring Hill
issued more than 1,100 residential building permits for
single-family homes since 2015, and over the past year its planning
commission has rezoned and subdivided properties to accommodate
thousands more, according to municipal records.
David Bowater and his fiancée were priced out of Spring Hill
when the rent on their two-bedroom townhouse rose to about $1,100,
from $875, over four years. "It's cheaper to buy at this point,"
Mr. Bowater says.
After bidding on six homes, they won the seventh. The house is
even deeper into the middle Tennessee countryside and farther from
the restaurants where they work. Mr. Bowater says it is costing him
about $100 a month more to own the home than he was paying in rent
on the townhouse, but that it is far cheaper than it would be to
rent a comparable home with a yard.
"We had to make a big offer," he said. "I just hope the bubble
doesn't burst and our loan goes upside down."
Write to Ryan Dezember at ryan.dezember@wsj.com and Laura
Kusisto at laura.kusisto@wsj.com
(END) Dow Jones Newswires
July 21, 2017 10:45 ET (14:45 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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