It’s not just new companies such as Promise entering the mix. Cerberus Capital Management LP, whose initial foray into single-family rentals consisted of making loans to landlords, is betting on working-class homes that generate lower rents than those owned by other large institutions.
The company’s FirstKey Homes unit acquired 8,000 single-family rental properties in the last six months of 2017, more than doubling its portfolio. The Marietta, Georgia-based landlord owns 14,000 homes spread across 24 markets and plans to triple its holdings, according to CEO Martin Esteverena.
FirstKey’s homes have average rents of about $1,300. By contrast, Invitation Homes, the largest U.S. single-family landlord, charged an average of about $1,700 in the third quarter.
Other investors are focusing in geographical areas that were largely avoided by early large-scale buyers. Tawan Davis, a Goldman Sachs Group Inc. alum, is focusing on East Coast U.S. cities sometimes seen as more complex — and costly — to operate in. His company, Steinbridge Group LLC, has acquired about 60 Philadelphia row houses that typically rent for $700 to $1,200, and it plans to eventually invest $425 million across areas such as Baltimore and Northern New Jersey.
The idea is to offer quality, affordable housing that lets families stay in gentrifying neighborhoods, Davis said.
“Our goal is to be a long-term presence in these neighborhoods, not to be a part of the problem,” he said.
Promise Homes also is touting a benevolent purpose in its mission. The company is the brainchild of John Hope Bryant, who has spent the last three decades promoting financial literacy and entrepreneurship in underserved communities. Initially, Bryant planned to assemble a small portfolio of homes as a sideline to his charitable work. He won backing from Ressler, the owner of the Atlanta Hawks basketball team, and Arougheti, who serves on the board of Bryant’s nonprofit, Operation Hope.
“Tony called me one day and said, ‘why do 100 when we can do 200?”’ Bryant said. “Then Michael Arougheti called and said, ‘why do 200 when we can do 1,000?”’
Eventually, they settled on a plan to acquire 2,500 homes by the end of 2019, focusing on properties that rent for about $1,000 a month and aiming for investor returns in the low double-digits. In a bid to pare the costs landlords incur when a tenant moves out, Promise decided to offer incentives, from gift cards to rent abatements and reductions for tenants who build a track record of on-time payments and work with Operation Hope to boost their credit scores.
Invitation Homes sold the properties to Promise Homes as part of a continuous process of optimizing its portfolio, said Dallas Tanner, chief investment officer at the Dallas-based landlord. The company still owns Atlanta-area houses that rent for about $1,000, and those homes have proven popular, Tanner said.
It takes considerable expertise for landlords to balance the costs of maintaining quality homes while also serving the bottom line, said Julia Gordon, executive vice president of National Community Stabilization Trust, a nonprofit in Washington.
“Just because homes are cheap to buy doesn’t mean that you can make a lot of money off them and still be providing safe and habitable housing,” she said. Owning affordable homes “purely as a financial instrument, the same way you’d buy bonds or stocks or something like that, that’s not going to work out well for the tenants, and it’s probably not going to work out well for landlords either.”
The market may get another boost as Freddie Mac moves into more financing of affordable homes. In January, the mortgage giant backed a portfolio of single-family houses in a first-of-its kind deal with TrueLane Homes, a landlord with 1,000 properties that rent for between $800 and $1,150 a month.
“The working-class markets and price point we operate in have been largely overlooked by other institutional investors,” said CEO Alan True. “It’s great to know that there is attractively priced debt to help fund additional acquisitions.”