Investment Banks Searching for Profits in SFH Rentals?

Question

Check out this report by Morgan Stanley. Looks like institutional money is moving into real estate investor territory:

[http://myrentalportfolio.com/wp-content/uploads/2011/11/Morgan-Stanley-SF-Report-Oct-2011.pdf]

This scares me! Imagine all the REOs and foreclosures being gobbled up by the ivy-leaguers on Wall Street!

Maybe I'm just seeing the glass half empty. There may be opportunity for us real estate investors. After all, I don't expect Lloyd Blankfein to put up drywall and install new furnaces :)

What are your thoughts fellow real estate investors?

Bill Gulley · Answer

Charles, you're right, they will likely require some repairs and they will need management in the area, but these are investment banks, not commercial banks. Investment banks don't lend at all in small numbers to the public. Such investments will probably exceed the yield on 15 yr. muni bonds or the market.....

Instead of writeoffs, they will take depreciation and carry the asset, just as investors do. Rents means the properties don't eat much or add to revenues, I don't think they are buying just anything unless the area has potential.

Basically, they get the property, pass it off to an affiliate bank, just as a seller financed scammer does taking a property back and reselling it or leasing it. And it might not be to an affiliate bank, it could be an insurance company or whatever going into the RE business. We will know how it pans out in 15 or 20 years but I bet they know what they are doing.....

Account Closed · Answer

I'm not seeing how this will help banks in the long run.  Sure property that rents out will be better than letting it sit.  Problem is that much of what they have is not going to be profitable to rent and they quite likely will have to invest money to make them rentable.  So they still will be bleeding.

At best this is going to be a way for them to manage the future disposal of these properties.

Keeping these home also doesn't free up money for loans or credit.

Bill Gulley · Answer

Call me paranoid if you like, but I thought this was an end game plan when foreclosures began to pile up. How to dump them and would it be in bulk by affiliates of the lenders....? I guess so.

I know we have a conservative bunch here, but can you see how the wealth is being transferred from the middle to the upper crust? I can't help but think much of all of what has gone on was orchestrated from the start, as the end game.

Oh well, they can't buy everyting......yet.

Michael Seeker · Answer

This is a very interesting (and well put together) presentation.  I'm surprised this is publicly available, but enjoyed reading it.

In my area the demand for SF rentals VS MF rentals seems to be disconnected, which follows the logic they discuss in the presentation.

I'm surprised it has taken such a catastrophic meltdown for institutional investors to recognize the returns and low volatility in the RE arena.

Mike Welch · Answer

There has been a tremendous amount of press coverage recently in the NY Times, WSJ, etc., on this very topic.  In my markets of focus, I'm hearing of large institutional investors, both U.S.-based as well as foreign, buying up large blocks of pre-MLS properties to put under management as rentals.

This trend will lead to a reduction in the amount of properties available, eventually driving up prices.  It will also create downward pressure on the rental rates that will squeeze undercapitalized small investors out of the market.

Another related trend I’m watching closely is the often floated concept of removing the mortgage interest tax deduction after the 2012 election cycle.  This deduction, one of the few tax shelters that the middle class is able to take advantage of, has been widely discussed as being in jeopardy of being revoked to reduce the deficit.  If this occurs, it would greatly benefit those large institutional investors who have accumulated many investment properties.  No doubt, they will be advocating its repeal to further solidify their investment as they consider ways to increase their pool of renters.