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Post-recession, rental homes becoming hot

Matthew Daneman, Staff writer

Apartment living brought Bill and Jennifer Schumacher together, with the two neighbors meeting while living at the same complex in the Philadelphia area.

When she received a job offer in the Rochester area, the couple didn’t have much time to move, yet they ruled out living in another apartment fairly quickly.

“We said, ‘There’s no way we’re going into another apartment’ — we need bigger space, we wanted some ground outside,” Jennifer Schumacher said while in the living room of the 1,900-square-foot Pittsford house they rent from Broadtree Homes.“This is a perfect opportunity. It’s kind of perfect.”

Rochester-based real estate company Broadstone Real Estate — which traditionally has focused on commercial properties ranging from medical offices to retail space — is increasingly diving into the single-family home market.

Earlier this month, it announced under its Broadtree Homes shingle that it had purchased 127 single-family residences in the Atlanta area for roughly $10 million.That purchase more than doubled the portfolio of single-family homes it began amassing in late 2012 in the Rochester area and around Minneapolis and Palm Beach County, Florida.

Big money has in the past been relatively rare in the rental house market. About half of the nation’s 14 million rental homes are owned by individuals who own just one rental property, according to an analysis earlier this year on the single-family rental market by New York investment banking firm Keefe, Bruyette & Woods Inc. About 2 million are owned by investors with 10 or more properties.

Renting single-family homes “has always been a mom-and-pop business,” said Broadstone CEO Amy Tait.

However, that neighborhood of big real estate companies involved in renting single-family residences is becoming increasingly crowded. New York-based financial services giant Blackstone Group LP is now the largest landlord of single-family homes, after spending roughly $8 billion over the past two years buying 43,000 homes. California-based American Homes 4 Rent, the second-largest such firm, started in 2012 and now owns more than 25,000 homes in 22 states.

“The financing for investor-owned properties has not been widely available, (and) the investment and lending opportunities are immense and perhaps just beginning,” Keefe Bruyette & Woods said in the analysis.

Plummeting home prices in recent years opened the door to the investment opportunity, said Dave Bragg, managing director of the residential research team at Green Street Advisors, a real estate research firm. Meanwhile, the armies of homeowners who saw their residences foreclosed still needed housing. “If you’re living in a 1,500-square-foot house, you probably picked that for a need for a space,” Bragg said. “Foreclosure victims … didn’t really shift into apartments.”

Owning a home was long synonymous with the American Dream. But homeownership rates are on the wane nationally. According to U.S. Census Bureau data, the percent of Americans who own their own home was roughly 65 percent in the first quarter of this year, the lowest it’s been since 1995. The rate peaked in 2006, when 69 percent of Americans owned their home.

“It used to be people thought renting was synonymous with going into an apartment community,” said Tait.

But the financial crisis added more renters as people lost their homes, along with a glut of foreclosed homes that came onto the market, she said. Coupled with technology that made it easier to research and sell rental homes, the door swung wide open for big investors looking at large portfolios of homes, she said.

“Until the crisis, it really didn’t make sense for investors to do this,” Tait said. “It’s a management-intensive business.”

In a conference call with Wall Street analysts in May, David Miller, CEO of Minnesota real estate investment trust Silver Bay Realty Trust Corp., said that shrinking supply of single-family homes for sale, as well as increasing home-building costs “point to continuing positive trends for future (home price growth) and rental demand, all factors which bode well for … the demand for single-family rental homes.”

Since its start in 2012, Silver Bay has purchased and now owns and rents more than 5,700 single-family homes in eight states.

However, some worry those deep-pocket buyers are pricing individuals out of the housing market. In March, a group of 80 organizations — from Neighborhood Housing Services of Greater Cleveland to the Fair Housing Council of San Diego — wrote an array of federal regulatory agencies, asking for rules or guidance regarding the big investments going on in rental properties.

That same month, U.S. Rep. Mark Takano, D-Calif., sent letters to the U.S. Treasury Department, Securities and Exchange Commission, Department of Housing and Urban Development, and the Consumer Financial Protection Bureau with numerous questions about the single-family rental market and the growth of bonds backed by the rental incomes from those properties.

According to the letters, despite low interest rates and purchase prices, southern California families and first-time home buyers “are finding it hard to purchase a home. It is increasingly the case that these homes are being purchased by investment companies looking to rent out the property, leaving the family purchaser of modest means shut out of the market. Similar stories are coming out of Florida, Arizona, Nevada and Georgia.”

“This is a new area that’s potentially going to grow bigger,” Takano said last week. “We have an obligation to try to understand it better — the financial instruments, the impact on communities, the impact on individual tenants. I’m not wholly comfortable with what I see going on — aspiring middle-class people being priced out of homes, out of a chance to get an equity stake in property ownership and what I also see as neighborhoods potentially destabilized while Wall Street extracts their cut before they want to flip and sell these homes.”

However, the pace of big firms buying houses has slowed in recent months as housing prices have climbed around the nation, Bragg said. Now those firms are more focused on consolidation and buying portfolios of homes from each other.

Broadtree is one of three lines of business for Broadstone, which also manages commercial properties including downtown Rochester’s Clinton Square tower, and also has a large and growing triple net lease real estate investment trust operation with assets of $900 million.

After dipping its toe in the market, having bought roughly 100 homes since late 2012 in the Rochester, Minneapolis and Palm Beach County, Florida, markets, “now we’ve learned enough to begin to ramp it up,” Tait said.

It has another 50 homes under contract in Atlanta. And Broadtree is looking at other portfolios of homes that had been previously snapped up by real estate companies now looking to sell. Tait said Broadtree has been offered well in excess of $1 billion worth of various portfolios as it looks to get more heavily into the market and own and operate the rental houses long term.

“There are lots of portfolios out there for sale,” Tait said. “It’s hard to do this efficiently without a couple hundred, 300 homes in a given market.”

Broadtree for now is looking at markets outside of Rochester for further home purchases, with a focus on areas that have greater growth potential — both in populations and in rents, Tait said. It also is busy raising its next round of cash for further acquisitions. While Broadstone investors typically have to make a minimum $200,000 buy-in, Broadtree for now is looking for investors to make at least a $50,000 investment, Tait said.

Eventually, the Schumachers plan to buy their own home. But for now, their two boys each has his own bedroom in the Buchanan Road house. Their two dogs get to enjoy a fenced-in backyard. They live on the type of quiet suburban street where everyone’s so friendly that neighbors brought Bill and Jennifer Schumacher house-warming gifts on moving in last December.

There’s only one drawback to the house, Bill Schumacher said: “Just the fact we don’t own it, that’s the only thing.”

MDANEMAN@DemocratandChronicle.com

Twitter.com/mdaneman