Big Firms Enter the Foreclosure-to-Rental Game

The business of buying foreclosed homes, fixing them up and then renting them out is no longer just for mom-and-pop operations. From the Wall Street Journal:

According to investment bank Jefferies & Co., major financial firms led by Colony,Blackstone Group LPBX +4.98% Och-Ziff Capital Management and Oaktree Capital Group LLC have raised more than $8 billion to buy houses, largely in markets pummeled by the housing crisis.

At first, many investors hoped lenders would sell foreclosed houses in bulk. But most banks prefer to sell one house at a time, figuring that approach will fetch higher prices.

As a result, the foreclosure circuit hasn’t yet produced a giant windfall for buyers like Colony, though executives say early returns are promising. Yields on rents from houses owned by the firm are 7% to 8%, higher than many other types of real estate. Purchase prices have averaged 12% less than Colony expected, which should make it easier to sell the homes or borrow against them and exit with double-digit percentage gains.

So what’s the end game? It likely depends on what happens to the housing market over the next couple of years:

Colony executives say the numbers look fine to them. Once the private-equity firm spends about $11,000 to renovate the house in Lithonia, Colony expects to rent it for about $1,550 a month. After taxes, fees and other expenses, Colony investors should get a net yield on this house of 8.2% a year.

Colony has indicated it may take its rental business public or sell its homes after values appreciate. “When I look at other opportunities out there in the commercial-real-estate space, to get the same current yield, adjusting for risk, it’s very difficult,” Mr. Fuhrman says. “Of all the real-estate asset classes, this is probably the most liquid.”