One Institutional Investor Is Going For Single-Family Rentals Where Blackstone Won't Touch
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As homeownership remains out of financial reach for a substantial portion of the U.S. population, single-family home rentals have been a ready compromise for years — but one firm is trying to do it differently.
New York-based The Steinbridge Group plans to invest $425M in the coming years into buying large numbers of single-family homes for the purpose of renting them out long term. Blackstone subsidiary Invitation Homes, the largest single-family rental company in the country after its merger with Starwood Waypoint this year, has been doing the same thing for years, but with a wildly different methodology. Steinbridge CEO Tawan Davis believes his method can keep homes affordable, without making any concessions regarding profitability.
Invitation Homes built part of its portfolio by purchasing large groups of homes from banks in packaged foreclosure deals in volatile markets — from the Southeast to the West Coast and with a couple of Midwest markets thrown in. The company buys homes primarily in the suburbs of major cities, targeting good school districts and population growth without much new housing supply, which drives rising rents, according to a 2016 Securities and Exchange Commission filing.
Though Invitation Homes Chief Investment Officer Dallas Tanner said his company purchases homes both directly from sellers and through foreclosure sales, the vast majority of the company’s portfolio was built in the foreclosure-heavy recovery period after the recession. In 2017, Invitation purchased fewer than 1,300 homes and sold about 1,000. By and large, institutional investors have slowed single-family purchases to a crawl — 97% slower than at the market’s highest point, according to Invitation.
“That’s part of the different stages and seasons of investment,” Tanner said of Invitation’s lack of new purchases.
Rather than the Sun Belt and the Southeast, Steinbridge is targeting what Davis calls judicial states — states that disallow bulk purchases of foreclosed homes, mandating that each foreclosure goes through its own legal process. Such states are primarily in the Northeast: New York, New Jersey, Massachusetts and Maryland contain the cities Steinbridge is targeting. And unlike Invitation, Steinbridge is buying homes within the cities themselves.
“We want to focus on people who need to live in and around the urban center, but can’t afford to buy a home because the starting price to get on the homeownership ladder is so high that working people can’t start owning as early as they might like,” Davis said. “Our tenants are often nurses, teachers, policemen, firemen, transit workers — people who are key members of the workforce of the city, but who can’t afford to buy a new house in those markets.”
Davis said Steinbridge has not purchased any houses through foreclosure and is buying homes in decent repair, at price points within the commonly held value of the neighborhood. He believes the lower risk of such purchases means less debt obligation, which means the returns are still satisfactory. Davis credits this equation with the slowdown in institutional home purchases.
“Once the publicly traded REITs figured this out, they stopped running after markets when they thought there would be huge recovery, and started being better operators to improve housing and bring operating costs down,” Davis said. “And all of that creates a stronger bottom line and leads to a higher valuation.”
Davis chose Philadelphia for the first city in which to acquire houses. After 18 months of research into which neighborhoods possessed the right combination of rising rents and housing stock, Steinbridge started buying about three months ago and has closed on about 60 homes with another 40 under contract. By the end of 2018, Davis hopes to spend about $50M on 500 homes in the city.
“If you think about our strategy, with regards to judicial states, major cities, working people and transitioning neighborhoods, you can’t avoid Philadelphia,” Davis said. “It has a very strong, in-place working community here, many of which have been challenged by increasingly expensive rental prices.”
The neighborhoods Steinbridge is targeting are Graduate Hospital, Point Breeze, Brewerytown, Grays Ferry and western University City — areas home value have increased substantially in recent years, but with considerable room for further growth. By holding houses long term and at scale, Davis said he can keep rents both affordable and profitable.
"We’re valued based on long-term, predictable income,” Davis said. “The longer and the more predictable the income, the higher the multiple. So it actually behooves us to find a good tenant that we treat very well, because if they stay for a long time, we get a higher value from that tenant than if we sold [the house].”
Steinbridge is charging between $700 and $1,200 per month on homes it owns in Philadelphia, which Davis claims is hundreds of dollars less than what smaller owners can make profitable. Without any mandate to preserve the affordability of its units, Steinbridge will remain responsive to the market, according to Davis.
“We don’t have any intention to jack up rents on tenants, because frankly, they can’t afford it and we’d lose tenants,” Davis said.
On Nov. 29, LA Weekly published an article claiming Invitation Homes had been increasing rents on rent renewals by as much as $250 per month and giving only a couple of days’ notice to clear out for tenants who balked at such increases. Invitation Homes also has been accused of selling mortgage packages on the rental homes it owns, backed by the rent it receives and using broker price opinion appraisals (considered less thorough than standard home appraisals) to goose the home’s total value.
Such behavior mirrors the credit swap strategies that led to the subprime mortgage crisis, which in turn created the institutional single-family rental market, LA Weekly reported. Rapid rent hikes could also be a way to increase revenue for selling such mortgage packages.
When asked about the rent hikes and the appraisal controversy, Tanner said institutional investors make up less than 1% of all single-family landlords.
“Our goal is to provide the most consistent service we can, and we can’t control what people write about us,” Tanner said.
Davis said making debt plays on the homes Steinbridge owns is not in the cards.
“That’s just not our model,” Davis said. “We’re buying so that people in and around the neighborhood can have a place to live as the neighborhood transitions. And that return is much more stable and much more tangible than short-term flips.”
Philadelphia will be the proving ground for that strategy, as Steinbridge looks for a permanent office in the city for its operations. It is currently taking temporary space at 222 West Rittenhouse Square, but its headquarters remain in New York, the outer boroughs of which will likely be the next area for Steinbridge to start buying, as well as the denser New Jersey suburbs, at some point in the next 12 months. After that, further expansion in the Northeast is likely.
“We’re probably a year and a half out at least from investing in D.C., Baltimore and Boston, especially because New York and New Jersey are such large and complicated markets that they will require our focus,” Davis said.