Rental Homes Become Securitized

By Christina Birchfield | 12/5/2013

Giant investment companies are packaging rental homes as securities. Is this sustainable?


Today, the cost of renting a home exceeds the cost of owning one in most housing markets, sparking concern that investment companies packaging rental homes as securities is a risky idea—possibly the next economic bubble and could negatively impact the housing industry.

During much of the fall, media from the The Chicago Tribune to Marketwatch reported about how pre-qualified single-family home buying families—who intend to live in the homes they buy—have been being trumped by all-cash investors seeking to turn those same homes into rentals.

Then, in October, a story on CNBC reported that some of these huge investor companies, such as Oaktree Capital Group, were selling their investment rental homes. It seemed as if the era of giant home investors might be winding down, but now there is a new twist. Some companies are beginning to securitize their rental home investments. Is it a way to get out of the rental market over time, a legitimate investment vehicle or the next bubble?

Laura Gottesdiener reported last week about a huge investor company called Blackstone Group, which is creating pools of securities based on rental incomes.

Gottesdiener wrote, “You can hardly turn on the television or open a newspaper without hearing about the nation’s impressive, much celebrated housing recovery. Home Prices are rising! New construction has started! The crisis is over! Yet beneath the fanfare, a whole new get-rich-quick scheme is brewing.”

Like the other behemoth investors, Blackstone Group paid cash for the homes it owns and rents, so the securitization is based on projected rental income (with the homes as the underlying collateral), which of course means the homes must be rented. The Blackstone Group calls its rental subsidiary Invitation Homes. Economist Dean Baker, of the Center for Economic and Policy Research described the assumptions made for the securities as ambitious. The prospectus assumes that the homes will have only a five percent vacancy rate at an average monthly rental of $1,312.

Few of us may be familiar with Blackstone, a New York City-based “multinational private equity, investment banking, alternative asset management and financial services corporation.” The company is in all of our lives. It has interest and ownership in companies from Allied Waste Industries to Cinemark movie theaters to Hilton to Legoland, Sea World, United Biscuits and the Weather Channel—that pretty much covers most of our lives without even renting us a home.

Particularly interesting are the maps in Gottesdiener’s story from places like Atlanta and Maricopa County, Ariz. Gottesdiener reports that Blackstone purchased 1,400 Atlanta single-family homes in a single day. In Phoenix, she writes, as many as three homes per block are Blackstone Group rentals in neighborhoods they have targeted for purchase.

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