What about the Single-Family homes?

What about the Single-Family homes?

It’s not the first time I heard someone saying : “Wish I bought a house during the downturn and leased it out. Would be making a fortune right now”. Turns out that these people aren’t alone. The publicly traded single-Family REITs (SBY, AMH, ARPI) are trying to capture exactly this. These companies had soaked up 1,400 – 1900 sqft single family homes between 2010-2012 with cost basis somewhere around $70-80 per square feet counting in renovation. For a 1,600 sqft house in Florida with 3 bedrooms and 2 bathrooms, let’s say, a company like Silver Bay probably paid $112k for the house ($70 / sqft) and about 15% extra for the fix-up ($10.5 / sqft). These companies, however, had been lingering around 0.9x tangible Book Value for the better part of 2013, but here’s something interesting:

Cost of Constructing a Single-family Home in 2013: http://eyeonhousing.org/2014/01/03/cost-of-constructing-a-single-family-home-in-2013/

So in 2013, it costs a homebuilder roughly $95 / sqft to build a new home. While the assets by the public companies are mostly 25 year houses, if they were simply liquidated at replacement cost (Maybe possible now that the market has bounced off), there is roughly ~18% upside to the marked cost-basis, and ~30% upside from the current 0.9x book value basis.

Another thing to note is that the beauty of the single family rental asset class in contrast to the rest of commercial real estate is that not only are there “cap rate driven” investor buyers, but there are also end user homeowner buyers and speculators (subject to animal spirits) who can bid prices up to levels far in excess of what traditional commercial real estate buyers would be willing to pay for.  And single family homes are an extremely liquid asset class relative to more traditional commercial real estate, with millions of individual transactions annually.

By no means a lay-up though. Skeptics cite dis-economy of scale, smart players like Oaktree already talking about exiting the business, and the property management part very difficult to get right. Traditionally this had been mostly a mom-and-pop space with a very people-intensive business model, so the rental economics of a scale player at maturity remains to be tested. Interesting place to play nonetheless – as it remains a frontier where most retail and institutions do not even have the infrastructure to participate.

The Oaktree Letter about getting lucky: Source: My words won’t do it justice. An insightful read to Mr. Marks’ philosophy again, you know it’s usually good…Source: http://www.oaktreecapital.com/MemoTree/Getting%20Lucky_2014_01_16.pdf

No, Netflix Is Not Doomed By the Net Neutrality Decision: Some good points by Derek Thompson: (1) Let’s say Netflix refuses to pay one ISP and the speed suffers, in the light of blaming the ISP vs. blaming Netflix, most customers’ will likely do the former and the ISP stands to lose thousands of subscribers; (2) if the industry bands together against NFLX, NFLX can (a) pay for the fast lane and (b) charge 10-15% more on top of the $7.50 monthly charge (which, let’s admit, is markedly low…Source: http://www.theatlantic.com/business/archive/2014/01/no-netflix-is-not-doomed-by-the-net-neutrality-decision/283134/

The Tipping Point (E-Commerce Version): Long article, here’s the kicker – while many cite online sales is only 7.5% of total sales, it’s heavily weighted down by health products + food & Beverage, 2 of the largest categories. Online Media and Electronics Sales, when isolated out, are 23% and 17% of respective total sales and has no sign of slowing…Source: http://recode.net/2014/01/14/the-tipping-point-e-commerce-version/