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Smaller Housing Markets Lure Individual Investors

Jul 28, 2017
 
 
Ronda Kaysen –  The New York Times –  July 28, 2017 –  After Andrew Bahr, a structural engineer, lost a bidding war last fall for a two-bedroom apartment in Queens, he decided he was done trying to buy real estate in New York.
 
“I was tired of looking around me and seeing all the home prices shooting up and I’m not getting a piece of that pie,” said Mr. Bahr, 26, who was stunned when a buyer offered $15,000 more than his $345,000 bid on the apartment in Jackson Heights.
 
Rather than wait for another apartment to come along, or save more money, he turned his gaze well beyond the city limits, all the way to Atlanta. On March 1, he bought a four-bedroom house there for $100,000.
 
In doing so, he traded in the dream of living in a home he owns for a chance to turn a profit.
 
A tenant lives in his Atlanta house, paying $1,050 a month — enough for Mr. Bahr to pocket $400 each month after paying his mortgage, taxes and property management fees. Mr. Bahr lives in Jackson Heights, in a studio he rents for $1,467 a month. “We live in the wrong state, we definitely do,” he said.
 
Mr. Bahr’s unconventional path to ownership is one that was carved in the aftermath of the 2008 financial crisis. After millions of distressed homes flooded the market across the country, some large institutional investors, like Blackstone, began buying and transforming single-family homes — a symbol of American upward mobility — into rental properties.
 
While publicly traded companies like American Homes 4 Rent and Colony Starwood Homes are major players in this market, most single-family rental properties are owned by small-time investors, like Mr. Bahr. In 2015, 85 percent of the 17.5 million single-family rental properties in the United States were owned by investors with portfolios of 10 properties or fewer, with 45 percent of those houses owned by investors with only one property, according to the Housing Finance Policy Center at the Urban Institute, a research institution.
 
Mr. Bahr found his house through a California-based company called HomeUnion, a one-stop shop for small-time investors that helps people buy, renovate and rent properties in 11 markets around the country. HomeUnion charges an acquisition fee of 3.5 percent of the purchase price; management fees of up to 10.5 percent of the rent; and a 10 percent fee for renovations over $2,500.
 
In exchange, Mr. Bahr can be a landlord at arm’s length. He has never visited his property and does not know the name or occupation of the person who rents it. “Sometimes I wish I was more involved,” he said. “A big part of my savings went into that property, and I feel like I should help out, but they’re doing it all for me.”
 
Don Ganguly, the chief executive of HomeUnion, which started in 2014, said that most HomeUnion investors live in expensive coastal markets, like San Francisco and New York, where salaries are high but so are housing costs. Their dollars go further in smaller markets, like Indianapolis, Dallas and Orlando.
 
The need to look farther afield for what is affordable is common for New Yorkers just searching for a place to live. Can’t afford to live in Brooklyn Heights? Give Bedford-Stuyvesant a try. If all of Brooklyn is out of your budget, welcome to New Jersey.
 
It turns out that aspiring investors face a similar conundrum. The mom-and-pop landlord who may have bought a rental property around the corner a decade ago now also needs to look farther, and since there is no need to actually live in the home, that net can be cast far and wide.
 
“In many ways, it’s an extension of the search for affordability in New York,” said Jonathan J. Miller, the president of Miller Samuel Real Estate Appraisers & Consultants. “This becomes another leap.”
 
But there is a difference between moving with your family to the suburbs and buying a house that is a plane ride away and occupied by a stranger. Buying a property that you may never see changes your relationship with it. Mr. Ganguly, who was initially surprised by how few HomeUnion investors flew out to see the houses they were about to buy, compared the process to buying stocks. “They flipped the switch in their head to say, ‘It’s an asset,’” he said.
 
Like stocks, a house may appreciate in value over the years, while rental income offers a steady return in the short term. On HomeUnion’s website, listings include detailed projections for returns. The company estimates that, on average, investors who put down 20 percent on a property and hold it for 15 years can expect annual returns of 11 to 19 percent, a figure that includes rental income, appreciation and increased equity.
 
But buying a house is hardly the same as buying stock in a company. Stocks don’t have roofs that leak or tenants who stop paying the rent — and stocks don’t come with monthly mortgage bills.
 
HomeUnion recommends that its investors set aside $1,000 per property in a reserve fund. However, $1,000 will not necessarily cover the cost of a boiler breaking the same month that a tenant moves out. If you lose your job or have other financial strains, you could be a paycheck away from trouble, even if your property is appreciating on paper.
 
“The possibility of a surprise $5,000 fee is always there,” said Callum Runcie, 42, who lives in Port Washington, N.Y., with his family and who owns three investment properties through HomeUnion. He earns about $2,000 a month on the portfolio. An air-conditioner recently broke at one of his properties, and he was waiting to hear back on the repair cost. “They said it’s kind of a big deal,” he said, referring to the property managers at HomeUnion. When a tenant moved out of one property, Mr. Runcie spent $2,000 on renovations while the home was vacant for two months.
 
Investing in a market that you do not know, and relying on a third party to manage the property, requires research, and trust in the company providing the information. “The biggest risk, if you’re investing in real estate, is that the house doesn’t appreciate,” said Nela Richardson, the chief economist for Redfin. “Not having local expertise is like going in blind.”
 
HomeUnion offers local market reports and listings that include details about local salaries, rents and demographics. Mr. Bahr read up on Georgia tenant laws before he purchased his home to make sure that he could easily remove a difficult tenant, if necessary. And, he has relatives who live in the Atlanta area, which made him feel more confident about it.
 
Ultimately, Mr. Bahr sees Atlanta as a more realistic option than the market where he lives. “I don’t think I’m ever going to be able to own a home in New York, unless my salary doubles,” he said. “I’d have to wait 20 or 30 years for that to happen.”
 
Instead of waiting on New York, he is planning to buy a second rental property in Atlanta.
 
A version of this article appears in print on July 30, 2017, on Page RE11 of the New York edition with the headline: Homeownership From Afar.
 
© 2017 The New York Times Company