Wednesday, May 16, 2012
More Entries Into Home Rental
The Wall Street Journal's Developments Blog had a post today on Colony Capital's push into the mass home rental market. Sounds like Colony is going about the business the right way. It's buying properties at cap rates of 7% to 9%, and has brought the property management in-house. The exit strategy is still fuzzy to me - liquidation is still one home at a time - but owning the homes in a REIT gives a sense of permanence.
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4 comments:
It is hard for me to see how they can buy at an 8-9% cap if they are realistic about maintenance and management costs. Colony will probably scrape off an asset management fee for all the value they are bringing to the table by joining this increasingly crowded space. They are certainly going to have vacancy and fix up costs related to re-letting if they are planning on holding this stuff.
Additionally, I doubt this model works at 8-9% cap rates for anything other than entry level housing, so they are competing with small mom and pop investors or 1st time buyers who can buy with 5.5-6% money (which includes the amortization of principal).
The use of cap rates in articles like this is hard to determine. The all-in cap rates are probably lower than 8% - 9%, and closer to 6% - 7%, after leasing and improvement costs. Entry level housing is best, much more of a commodity and improvement and carrying costs are lower. Leverage works both ways, if Colony can get some of that 5% money it boosts total returns.
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