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How Single Family Home Investing Can Save The Housing Market

This article is more than 10 years old.

Buying single family homes as an investment just might save the housing market, says one of the country's biggest real estate investment firms in New York.

GTIS Partners, one of the largest investors of global real estate, has its eyes set on new, uniquely American investment opportunity. It's less exotic than their usual hot spots. And far more distressed. Which makes the assets quite cheap.  U.S. single family housing is back. This time, as Forbes writer Morgan Brennan reported this week, investors like GTIS are buying groups of single family homes not to flip them, but to rent them. If their calculations are correct, they just might be able to save the U.S. housing market.

"You've got 14 million homes under water in the U.S. About 7 million are deeply underwater and about 3.6 million in that group are on the verge of foreclosure," says Tom Shapiro, president and founder of GTIS.  Shapiro is the expert here.  This focus on U.S. single family property is interesting for someone like him, who is just as comfortable, if not more so, talking about commercial property in Rio de Janeiro-- where GTIS is currently building a new office tower.

As Brennan reported on Tuesday, the National Association of Realtors’ Investment and Vacation Home Buyers Survey reports that investment-home sales rose a substantial 64.5% last year, with investors buying up 1.23 million homes compared to 749,000 in 2010. Even Warren Buffett, told CNBC that distressed single-family homes were one of the best investment opportunities around, adding, "It’s a leveraged way of owning a very cheap asset now and I think that’s probably as an attractive an investment as you can make.”

In March, Bank of America said it would test its own pilot program, allowing approximately 1,000 homeowners facing foreclosure in New York, Nevada and Arizona the option to remain in their distressed homes and pay rent. They could stay in these abodes for up to three years, shelling out rent payments set at or below market rates that will be lower than current monthly mortgage payments. After three years, the bank aspires to sell the properties to investors.

This is a market that investors like Shapiro don't want to miss.  Neither do I.  If I don't buy a home this year or by early 2013, I really fear I will have missed a major opportunity.  Only GTIS Partners has deeper pockets than I have, and so big money investors can afford not one, but a collection of cheap, distressed, single family homes with upfront payments on equity.

Not only will GTIS be buying houses at a discount, but they are also tapping a growing trend in the rental markets, and that is people are renting homes, not apartments. .

Around 55% of unmarried households live in single family homes, but when people marry, they 82% of them live in a single family home, according to GTIS data.

"When people lose their home to foreclosure, they don't move to the inner cities and rent rooms in an apartment building. They tend to rent houses in the same area, especially if their kids are in school there and they're entire social network is there. By our estimates, single family home rentals are up 21%," he says.

According to the Fed Consumer Credit Panel, 60% of people who went through foreclosure ended up renting a single family home, while 23% rented an apartment.

Is this the 2000s all over again? When investors from richer urban centers began buying up second, third and fourth homes in outlying towns.  In mid 2005, when Boston real estate was nearly a $1 million in most neighborhoods, second homes on Cape Cod were doubling fast. The working class people who lived and worked on the Cape year round were priced out. Those that bought out of fears of continued price hikes, which actually came to pass from 2004 to 2007 as prices soared, were looking at short sales only a few years afterwards.  I almost bought one of them in 2008 in Hyannis, but was living in Brazil and didn't have enough time for due diligence. Good thing, because prices have fallen further since then.

"Investing in single family homes for rental income is good for the economy," says Shapiro. "It takes foreclosures off the hands of lenders and it keeps property values stable because neighborhoods cluttered with 'for sale' signs lose value. Some suburban towns are considering just knocking down entire developments. I see that as a waste of time and a loss of a lot of money. It's an opportunity lost, really. Rent them out. It keeps the supply of rentals up, which means it keeps the pressure on rental prices down. And it takes homes off the market, which is very good for housing prices," Shapiro says.

Single family homes have become part of GTIS Partners' residential investment strategy. They're picking their spots, starting off in Chicago and Florida, currently, but looking at seven markets to make concentrated buys and hire a management team to collect the rents and care for the properties. They'll centralize the buying, acquiring white line goods for the properties in bulk, from new stoves to washers and dryers, and deal with the plumbers and electricians.

"In the future, I think we can build 75 single family homes in a community and just rent them out for long term income," he says.

A total of 6.3 million new renter households are expected in the next five years as Generation Y wants to live in homes in desirable areas, but cannot afford the down payments to buy. Single family homes are already the largest segment of the rental market, especially for families and for people living outside of large urban centers like New York. A total of 34% of the rental stock in the U.S. is comprised of single family homes already, followed by 31% in two to 10 unit apartment buildings. The remainder are larger apartment complexes. Single family units are expected to increase as this trend attracts institutional investors.

Providing investor demand doesn't go haywire with all this liquidity, then Shapiro has a point.  There are benefits to the rental solutions. This isn't the early 2000s when people could borrow against their first home and speculate on another home by the beach or outside the casino towns of Nevada with no money down. The housing crash was more due to the derivatives blowout that followed in the collateralize debt and mortgage obligations as it was subprime lending and mortgage fraud. If that is truly behind us, and I'm not saying all of it is, then taking empty houses off lenders' hands and renting it out might be a win-win solution, Shapiro says.

Areas that were built up and never sold can be taken over by private equity firms or GTIS Partners and rented. The backlog of distressed homes can be cleared faster than the regular lender owned, or REO, sale process. Empty and fast deteriorating unsold homes can be renovated and rented out, keeping neighborhood property values stable. No one wants to buy on a street loaded with short sale signs and busted windows. Property taxes and insurance will start getting paid on the properties again and, better yet, rental supply increases in some cities will mean rental price depression at a time when most Americans aren't making  a whole lot of money to be spending on housing.

"We were buying homes and liquidating them before. Now we are buying in bulk to rent," Shapiro says. "It's better than letting those homes sit there useless and that makes it a plus for the housing market."