An Early Investor Says Buy-to-Rent Is Over

Carrington stops buying homes as rising prices reduce returns | “There’s a lot of — bluntly — stupid money that jumped into the trade”

John Gittelsohn

Money manager Bruce Rose was among the first investors to coax institutional investors into the mom-and-pop business of single-family home rentals. Now, with house prices climbing at their fastest pace in seven years and investors swamping the rental market, Rose says it no longer makes sense to be a buyer and has started to sell. “We just don’t see the returns there,” says Rose, chief executive officer of Carrington Holding. “There’s a lot of — bluntly — stupid money that jumped into the trade without any infrastructure, without any real capabilities and a kind of build-it-as-you-go mentality that we think is somewhat irresponsible.”

Carrington, which started in 2003 as a mortgage investment fund and has managed almost 25,000 rental homes for itself and others, has been joined by hundreds of institutional and international investors buying single-family homes after prices plunged in the housing crash. Thanks to that flood of money, single-family homes that are purchased to be rented have become a new asset class, comparable to apartment buildings or office buildings, according to a Goldman Sachs report, which estimated the value of the 14 million leased single-family residences in the U.S. at $2.8 trillion.

It’s getting harder to buy properties cheaply, with purchase prices rising 11 percent in April from a year earlier to a median of $192,800, according to the National Association of Realtors. Asking prices for rents rose just 2.4 percent in the 12-month period, according to Trulia. As a result, Rose estimates that funds buying property will get rents equal to 6 percent to 8 percent of their investment a year, before costs such as insurance, taxes, and vacancies. That’s not enough for Carrington, which in January 2012 got financing for up to $450 million of rental home purchases from Oaktree Capital Group, an investment company that demands high returns on its money.

Companies that release financial results for single-family rental investments have reported losses in part because they acquired homes faster than they could renovate them and find tenants. Colony American Homes, a division of Thomas Barrack Jr.’s Colony Capital, has found tenants for only 51 percent of the 9,931 homes it bought for $1.4 billion, according to a May 28 regulatory filing. American Residential Properties and Silver Bay Realty Trust reported losses in the quarter ended March 31. The three companies declined to comment.

Changing market conditions haven’t deterred Blackstone Group, the largest investor in single-family rentals. It’s spent $4.5 billion to amass more than 26,000 homes, says Eric Elder, a spokesman for Invitation Homes, Blackstone’s rental housing division, and is “continuing to purchase homes where they fit into our business plan.”

The bottom line With home prices up 11 percent and rents up only 2.4 percent, Rose says it no longer makes sense to buy houses to rent.


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