There’s a new landlord in town. Well, actually, there’s a new landlord in a whole lot of towns.
Back in the day, when land lording was more of a labor, rather than a capital-intensive endeavor, a landlord renting out single-family homes might have owned only a handful of properties – and usually all within the same limited geographic area. Leasing, repairing and maintaining houses, dealing with tenants and local governments, was a business that generally did not lend itself to a far-flung, high-inventory model.
But that was before the housing bubble burst and millions of Americans lost their homes. That’s when the paradigm shifted.
The Great Recession Changes Everything
That’s when a new type of landlord emerged. One who took a broader view. One who looked around and saw lots of foreclosed, short-sold, auctioned-off, walked-away-from, single-family homes just sitting out there waiting to be picked up on the cheap. Tens of thousands of properties, all over the map – especially in states that were hit the hardest when the bottom fell out: Arizona, Florida, Nevada, Georgia and North Carolina. Houses worth $400,000 before the crash, now priced well under $200,000.
This new landlord recalled the first law of capitalism: Buy low, sell high. Well, that first part’s a slam-dunk. Market bottoms out, time to shop. Easily done. But how to sell high? Who’s going to buy a house and when? Back before the crash, a property could be flipped quickly to the next guy in line. That’s one of the reasons prices skyrocketed during the early 2000s – speculative buying. That, and cheap money and mortgages sold to anyone who could hold a pen.
But that was then. Now, the new landlord, who is a capitalist after all, had to come up with a new idea, a new business model that promised a payoff sometime up the road, provided a steady flow of cash until then and most important, attracted enough investors so that everyone can make some serious money when the time finally comes to sell high.
Owners Become Renters
So, here’s the pitch: Say, you’ve got a house that’s in pretty good shape that you bought for dimes on the dollar. You’ve also got a nice big demographic of displaced homeowners who lost their houses to the vagaries of the marketplace. Well, busts happen. Now, these former mortgagors can’t afford to buy right now; if they could, they wouldn’t have lost their homes in the first place. But they do need a place to live. So what do you do? You rent to them.
Now, the rent money is not the payoff, but it is the cash flow. It covers expenses while the housing market slowly and steadily appreciates over the next couple of years. Assuming, of course, that the economy doesn’t fall back into recession or over a cliff, fiscal or otherwise.
Turning a Profit
At some point, you put that house up for sale. That’s the payoff. That’s when you actually start seeing some double-digit returns. You can even sell it to its current tenants. Hey, wouldn’t it be interesting if the new purchasers were also the home’s original owners? They’d be buying their own house back again. Funny how things work out, sometimes.
In any case, if you have lots and lots of these houses, and all goes according to plan, you can get very rich. And remember, you’re also doing something valuable – you’re helping to clear foreclosed homes from the market, you’re renovating vacant properties and you’re revivifying neighborhoods. Hey, you didn’t wreck the economy. You’re just picking up the pieces. Capitalism’s second law: There are winners and losers. Some people lost their homes; your gain.
It’s Not Your Father’s Landlord, Anymore
So who is this new landlord, anyway? Well it’s not a single person or even a small group of people. The new landlord is a well-endowed private equity firm like the Blackstone Group in New York, which has already bought 6,500 homes. It’s the Colony Capital Group of L.A., which snapped up 4,000. It’s Silver Bay Realty of Minnetonka, Minn., which has acquired 2,200 houses and is planning to go public as a REIT – a real estate investment trust – so that even small investors might have a chance to ride this new speculative vehicle into a profitable future.
The new landlords in town are investment firms and hedge fund giants, and they’re spending billions of dollars buying distressed-priced housing all across the county in hopes that the American Dream of owning one’s own home will have a strong second act sometime in the not-so-distant future. And when that day arrives, they expect to be holding lots of keys to lots of castles.
It should make them lots of money. That, too, is the American Dream.
Bill “No Pay” Fay has lived a meager financial existence his entire life. He started writing/bragging about it in 2012, helping birth Debt.org into existence as the site’s original “Frugal Man.” Prior to that, he spent more than 30 years covering the high finance world of college and professional sports for major publications, including the Associated Press, New York Times and Sports Illustrated. His interest in sports has waned some, but he is as passionate as ever about not reaching for his wallet. Bill can be reached at [email protected].