Back in November, I wrote a column entitled "Some rental investments don’t pay off," in which I wrote that some cities such as Phoenix and Denver were showing signs of a single-family-home rental glut.
I immediately received a scathing e-letter from Andrew Waite, the publisher of Personal Real Estate Investor magazine, which targets people who invest in single-family homes. It’s his job to tout single-family home investments and he took serious umbrage at my column.
Basically, his message to me was: "There is a price war among property management companies to get investor business and thus rental inventory because there is such a dire shortage of ideal SFDs (single-family dwellings) for tenants."
He was talking about the Phoenix area, and I thought his comments interesting because about that time I had interviewed one state’s most prominent economists, who also talked about a glut of single-family home rentals in the Phoenix metro area.
So, the obvious question was: Who’s right?
Initially, I called Waite, which is not always a pleasant task, as he generally has a lot of opinions, all of which are based on the fact that he is right and everyone else isn’t.
At first, he excoriated me for writing a misleading article and that my big problem was that I wasn’t an investor and therefore not in touch with the right people. OK, then who are the right people I should be talking to? Waite gave me a list of four companies. I gave all of them a call, but only two deigned to get back to me.
The first fellow I called, Geoffrey Jacobs, was a principal in a Scottsdale, Ariz., company called The Empire Group LLC. He and his partner were veteran real estate developers and early in 2009 put together a couple of funds to purchase single-family homes.
"There was no development going on — it was just something to keep us busy for a while," Jacobs explains. "Specifically, we are buying in the Phoenix area and we are going to hold product for three to five years."
The Empire Group’s target was the lower-end product, which the principals assumed would rent steadily with positive cash flow. By the end of 2009, Empire had already purchased 70 homes.
Did Empire’s experience support Waite’s viewpoint that there was no glut of single-family home rentals? The answer: Indubitably!
"In terms of the idea that there is an oversupply of rental, in our experience that’s just not true," Jacobs tells me. "We’re running about 85 percent to 90 percent occupancy. The product is leasing as fast as we can make it available."
Empire acquires for cash, and, according to Jacobs, the investments are cash-flowing at over 8 percent net of all expenses, management fees, leasing fees, projected repairs and other costs.
Probably the key to Empire’s success is that it buys relatively new product, nothing more than 10 years old, and no homes in "inner-city" areas. …CONTINUED
"If you have a foreclosed homeowner, family or couple, none of them want to live in an apartment," says Jacobs. "Especially if they have kids, they want to be in a house. They can rent a house for the same cost they can rent an apartment — or close enough. In a lot of these areas, which are newer subdivisions, where we are buying, there isn’t any comparable apartment product available that anyone would want to be in."
The Empire Group was solidly — and I should add smartly — in the no-glut zone.
Then I talked with the second investor, Michael Sargent, a principal in the Glendale, Ariz., firm of HomeLovers LLC, which currently manages 500 rental homes in the Phoenix metro.
Being a bigger manager and deeper into the Phoenix markets, Sargent was not so unqualifying in his support of the no-glut-in-Phoenix theory. He also didn’t think much of the playing field in which the Empire Group wallowed.
"A lot of investors are stuck in what used to work very well, but in our opinion doesn’t work today — the market for under-$100,000 properties including $50,000 condominiums and townhomes," says Sargent. "This is the cheapest end of the rental pool. Those properties rent very slowly because they compete with apartments. Whenever we see one of them come in, we almost groan because they are so hard to rent."
Sargent says this price level doesn’t make good sense for investors, and it is the price range where "you get the glut."
What product does HomeLovers target? Its sweet spot in terms of "fast turns and no gluts" is a 2,000-square-foot house with three bedrooms and two baths. Actually, the more bedrooms, the better. His company has absolutely no difficulty in turning around for rental four- and five-bedroom houses in nicer neighborhoods.
"There are a lot of dominoes that foreclosure rates push over," Sargent says. "One of those dominoes is great folks in great neighborhoods who are in trouble because the housing market fell. We have a lot of people out there who have a lifestyle that still supports being in a nice neighborhood, but their credit no longer supports them being there. What we are seeing is a huge demand for product from people who two years ago would have been homeowners and today have to rent."
HomeLovers is also doing well with about 7-8 percent vacancy across its static portfolio. When I spoke with Sargent he was signing up another 50 homes, all of which were vacant. "Ten percent of our portfolio is vacant at any given time because of new sign-ups," he says.
But, Sargent cautions, his company’s formula for success doesn’t apply to every ZIP code. Sargent specifically avoids some of the new, huge developments that went up in the very far exurbs of the Phoenix metro, even with homes that are in his target size.
He concludes, "You have to pay attention to where you are buying."
Waite might be right that there is no glut. Or, he might be wrong. There is no glut in specific, targeted markets. It’s all about narrowly defining your target market and not just buying willy-nilly.
If you prove to be a glutton for properties outside of proven demographics, your investments could become glutinous.
Steve Bergsman is a freelance writer in Arizona and author of several books, including "After the Fall: Opportunities and Strategies for Real Estate Investing in the Coming Decade."
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