Making Sense of Single Family Home REITs

houses-691586_1280.jpgIf you lease a single family home, you won’t expect a real estate investment trust (REIT) to own it. This is because most real estate companies would rather invest in apartments communities that give them multiple properties for investment in one location. Renting out a single family home defies the aspect of scalability of the investment. Although it seems to be counterintuitive for a real estate investment trust (REIT) to own single family homes, they have been increasingly successful.

Single family homes can be costly for REITs because each house needs to be taken care of. This includes prospecting and acquiring individual homes, its renovation and repairs, marketing, maintenance and managing other matters, whereas in multiple housing properties some of these can be done at a collective level, thus reducing time, effort and expenditure. However, it can be argued that single family homes have the advantage of saving on costs of common area and amenities.

chart01Renting out of single family homes by local real estate businesses seems to make much more sense. It is much easier for them because local businesses know the positives of the location on a micro level and availability of infrastructure and other facilities like proximity to schools and shopping places, among others.

However, due to a large number of foreclosures following the Great Recession, some residential REITs have made good deals by acquiring a great number of such properties in Florida, Georgia, Illinois and Texas. These REITs acquire single family homes from various sources, but foreclosure is a common method among them.

chart02A positive for REITs is that foreclosure can be a lengthy process and can easily test anybody’s patience and money. A sizable company with an experienced management team would have stamina to better endure the procedures. Also, if a company operates in several states, it has to know the applicable rules for each state.

Since this is a relatively new business model for REITs, it hasn’t been thoroughly tested and there are multiple uncertainties on how these investments should be dealt with.

chart03.pngIf such companies can increase footprint density by aggregating multiple properties in nearby places or neighborhoods and building an efficient management system, then they are more likely to thrive. Both recent transactions – the purchase of American Residential Properties by American Homes 4 Rent and the merger of Colony American Homes and Starwood Waypoint (forming Colony Starwood Homes), which have overlapping areas, should benefit from some of the cost synergies.

Source: American Homes 4 Rent (NYSE:AMH), Colony Starwood Homes (NYSE:SFR)

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.

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