More Foreclosure to Rental

Here is another article on large scale foreclosure purchases with the intent to rent, this time from the New York Times.  Waypoint Real Estate Group, which I wrote about last month, was profiled again, and the article says much of the same.  I still think the exit strategy will frustrate the private equity / hedge fund investors.  One point not discussed in the article is home affordability.  Several years ago, even after home prices started collapsing, you couldn't buy homes in Southern California as competitive rental properties.  The yield was too low, I'd guess in the 2% to 4% range.  Waypoint is earning 8%, after improvements on its acquisitions:

An algorithm calculates a maximum bid for each home, taking into account the cost of renovations, the potential rent and target investment returns — right now the company averages about 8 percent per property on rental income alone.

While this is good for Waypoint investors, it's better news for other potential home buyers and current home owners, because it addresses home affordability.  Yields this high on home rentals indicate that home prices are more affordable, because price and yield are inversely related - low yield equals high prices and high yield equals low prices.  

Waypoint's growth projections are amazing.  It started buying homes in 2008 and now owns 1,200 homes, but it expects to have 10,000 to 15,000 homes by the end of next year.  An important part of these rental transactions is the "turn" - making the improvements and getting the property rented after acquisition.   Time and low costs are crucial, as cost overruns and delayed rentals at the outset impact the long-term total return of a property.  Good property management is vital, and Waypoint is going to have up to 15,0000 different locations that need overseeing.  The properties need to stay leased and maintained over the hold period so that the properites can benefit from rising real estate prices.  It's easy to spot the opportunity with foreclosed homes, but the profit potential is not so great that sloppy upfront execution and bad property management won't spoil the investment.