Hedge Fund Buys 21,000 Homes
Interesting real estate news came out recently that a major hedge fund bought 21,000 homes over the past few years. American Home 4 Rent bought these homes starting in 2012. This is a publicly traded Real Estate Investment Trust (REIT) on the New York Stock Exchange. Since January 2014, the share price of the REIT went from around $16 to $18, with one dip down to $14 at the beginning of 2016, when the entire U.S. stock market had a major downward move.
The stock price quickly recovered and currently is around $18 with an annual dividend of just over one percent. The current market cap valuation of the REIT is over US$4.3 billion.
What is more interesting than the performance and the stock price of this REIT is investigating why the hedge fund made such significant investments in single-family homes to turn them into rental properties.
Positive Cash Flow
The key to becoming a successful real estate investor that owns rental properties is creating a well-managed real estate portfolio that creates positive cash flow. Positive cash flow is a calculation that looks at the cash profits derived from owning the rental properties after paying all the expenses, which also considers the tax benefits.
If an average rental property creates positive cash flow after paying for the mortgage loan payment, maintenance, and management expenses, this is a good thing and this is the goal. Even a small amount of positive cash flow can be significant.
Here is an example from the Houston area using the data found on Areavibes:
Median Price for a Single-Family Home in Houston – $124,700
Median Monthly Rent for a Single-Family Home in Houston – $837
Renter Occupied Households in Houston – 54.1% (this means there are plenty of rental tenants)
Mortgage Rates Fall Sharply
The Wall Street Journal reported on June 15, 2016 that mortgage rates are the lowest that they have been for years. The rate for a 30-year fixed mortgage fell to 3.59%, which is the lowest rate since April 2013.
Hedge funds raise money by issuing large amounts of debt. Not only do they get the lowest rate for borrowing funds; when they buy properties, they already have the cash on hand to purchase them for all cash. This allows them to get steep discounts from the median market values, especially when they buy distressed properties or the loans on properties that are in arrears (payments are late).
Using this figure, the home in Houston shown in our example above would have a monthly debt service of around $560. If the property taxes, insurance, maintenance, and property management costs are less than the rent minus the loan cost ($837-$560 = $307), the property will have a positive cash flow.
Even $50 per month of positive cash flow per home is significant. When an investment groups own 21,000 homes, the profits of $50 each total up to be over one million dollars in profits per month.
Property Values in Houston are Increasing
Since 2012, the median value for a home in the Houston area has increased in many neighborhoods. The Houston Business Journal noted in June 2015 that in 25 Houston neighborhoods home prices increased between 6.4% to 21.3% per year. The average was about a 7.7% increase for all of Houston during 2015 according to Zillow.
Summary
Hedge funds find out how to make money and see owning single-family homes as rental properties to be a very good investment now. Smaller real estate investors can learn from this and follow their example.