Tuesday, Jan. 24, 2012 | 2 a.m.
Hedge funds could be the next big player in the Las Vegas real estate market. And I’m not talking about apartment complexes or commercial property. I’m talking single-family homes.
In other words, in a year or two, if you’re renting a single-family home like an increasing number of valley residents, your landlord could be a hedge fund or some other “alternative investment vehicle,” such as a private equity group, pension fund or university endowment.
“We’ve been contacted by a number of different groups who have never considered owning single-family residences as rental properties in their investment portfolios,” says Brian Krueger, vice president for strategic services at Coldwell Banker, the real estate firm.
These financial powerhouses could buy hundreds of homes at once. Cash buyers already constitute half the home purchases in the valley.
Krueger can’t say who the suitors are, and he says none have taken the plunge, yet. They are dipping toes in the water, however.
“They are organizing money and have started to come in and do due diligence,” he says.
Doug Brien, managing director and co-founder of Waypoint Homes, tells me he was in Las Vegas last week to survey the landscape. Waypoint, an Oakland, Calif.-based company, has bought 1,000 homes as rental properties in other markets. Brien’s group GI Partners has raised $400 million from an Ivy League endowment and a large institutional investor to buy many more. With leverage, the fund could grow to $1 billion.
This seems likely to happen here in Las Vegas because it’s already happening in other markets.
The Wall Street Journal reported in August that McKinley Capital Partners has bought more than 300 foreclosed single-family homes in the Bay Area and has a partnership with Och-Ziff Capital Management Group LLC, a New York hedge fund, to buy at least 500 more.
What’s the play in New York hedge funds becoming landlords?
“It’s just another distressed asset,” says Robert Lang, director of Brookings Mountain West and a real estate expert.
Hedge funds are investment funds looking for good returns that other people aren’t aware of or don’t have the resources to capture. They’re like Billy Beane in “Moneyball,” hoping to find underpriced assets. (At other times they look for assets they believe are overpriced and bet against them. Hence the name, hedge fund.)
In this case, they’re reacting to the emergence of what Oliver Chang of Morgan Stanley calls “a rentership society” — a play on the Bush-era “ownership society” buzz phrase. In a research report, Chang says people losing their homes and their credit ratings to short sales and foreclosures, combined with tight mortgage credit, means many people are suddenly looking to rent. But they’ve grown used to the space and amenities of a single-family home so they’re not interested in a conventional apartment.
Meanwhile, with all the bank-owned homes coming on the market, there’s lots of supply.
Throw all this together, and between 2005 and 2011, the number of families in Florida, Arizona and Nevada renting a single-family home has increased 67 percent, according to Dennis McGill of the firm Zelman & Associates. Meanwhile, the homeownership rate here continues to plummet toward 50 percent.
The Journal says McKinley’s model is to buy a house for $100,000, put $10,000 to $25,000 maintenance into it, rent it for $1,200 per month and then see annual returns of between 8 and 12 percent. Given the current economic volatility, this is an outstanding investment.
Assuming prices stabilize and begin to rise in a few years, the return only improves.
Lang says Las Vegas is a viable market because much of the housing stock is relatively new and standardized — like McDonald’s hamburgers, they may not be gourmet, but each one is more or less the same. It would be harder to buy up hundreds of homes in older cities because each house is often different from the rest and thus not as simply packaged.
Still, it’s no sure thing. One reason, it’s an entirely new business for these firms, requiring local boots on the ground — Realtors, contractors, property managers.
A recent white paper from the Federal Reserve also speculates as to why we haven’t seen bulk buying in the single-family residence market, questioning whether investors can find financing and achieve the necessary efficiencies to make it profitable. There’s also government-controlled Fannie Mae and Freddie Mac and resolving how the federal government wants to dispose of all the homes it now owns.
How should we feel about all this?
On the one hand, conventional wisdom tells us that an owner is a better neighbor than a renter. Perhaps. But at this point, we’re becoming a city of renters, so I’m not sure if it matters if the landlord is a hedge fund in Greenwich, Conn., or a guy in San Diego who owns five rental properties. Both have an interest in maintaining the properties, which also means maintaining the neighborhoods.
Brien hopes to bring a “lease plus rewards” program that would help tenants, who have lost a home or can’t get financing, rent a house and earn credit toward a later purchase. He would also offer financial fitness counselors who would help tenants shore up credit and move toward ownership. This sounds like an ideal program for Las Vegas.
Brien notes a couple of reasons why investors might hesitate to buy into the Las Vegas market. First is the economy, including our heavy reliance on gaming, conventions and tourism and questions about how that will affect job and population growth. (This first hesitation seems like a good reason to diversify our economy.) And, second, uncertainty about prices, given their continuing declines.
If big investors such as Brien come in, they would help suck up inventory and get us to the bottom, while also signaling to the world that the smartest and richest investors on the planet are betting on Las Vegas.
On the downside, as Lang notes, when people in the valley owned their homes and their values were rising, that wealth was accumulating here. Now, many of those rental checks could be sent to investors somewhere else.
Which means we’re like an economic colony.
But that’s always been the case.