Is The "Buy to Rent" Party Over?

Tyler Durden's picture

Submitted by Michael Krieger of Liberty Blitzkrieg blog,

For well over a year now, I have been writing about how this whole “buy to rent” investment strategy is one of the biggest disasters waiting to happen within the U.S. economy.  I have repeatedly noted that these private equity clowns were crowding into these markets with reckless abandon and that this would ultimately crush their business model as there’s no way rents can rise enough to keep yields attractive in a country where most people are struggling to meet their daily expenses.  Well it seems the day of reckoning may be at hand.  From Bloomberg:

Rents for single-family homes are rising slower than property prices as firms such asBlackstone Group LP (BX) flood the market with homes for lease, posing risks to investors betting billions on the burgeoning market.


Monthly payments for properties in Phoenix rose 1.3 percent in February from a year earlier, compared with a 25 percent jump in for-sale asking prices, according to Trulia Inc. (TRLA), which operates an online listing service. In Atlanta, asking prices climbed 14 percent as single family rents gained 0.5 percent, and in Las Vegas rents dropped 1.7 percent even as asking prices soared 18 percent.


Seems like a fantastic business model...

“Investors are buying homes, in part, to rent them out, and that has added a lot of rental supply, and that’s preventing rents from rising,” Jed Kolko, San Francisco-based Trulia’s chief economist, said in a telephone interview. “It means some investors will start to think about selling those single-family rentals.”


“They’re effectively pushing prices up on each other,” Chang, a former Morgan Stanley housing analyst, said in a telephone interview.


Tina Africk, a Las Vegas broker who manages 60 single- family home rentals, said houses that might have rented in 30 days in the past can now take 60 to 90 days to fill, while rents have dropped about $100 a month from a year ago.


“What we’re seeing is a game of musical chairs,” Wilcox said. “People lose homes to foreclosure and then rent a single-family home from an investor while another investor buys the foreclosure they just left.”

That folks is the U.S. economy in 2013.

Orr estimated that large investors bought 8 percent of the Phoenix-area homes sold last year, peaking in July and August before tapering off as prices rose. Purchases by all investors dropped to almost 32 percent of transactions in January from more than 39 percent a year earlier, he said.

So the almost half the housing market in Phoenix consisted of investors.  Sorry, that’s downright terrifying.

“One of the risks is prices run up and therefore the rental economics don’t justify the business model,” Rahmani, who has an outperform rating on Silver Bay and Colony, the equivalent of a buy recommendation, said in a telephone interview from New York. “The problem could be that you would have assets that are up a lot in value, which isn’t the worst thing in the world. The risk would be that everybody goes to sell at the same time.”

No Rahmani, all you need is for prices to rise to the point the entire business model is dead and then people stop buying.  You don’t even need to see rampant selling.  If the buying dries up, the housing market will totally crash once again.

Monthly leases in Phoenix’s west side, where investors bought the most rentals, fell by about $100 a month, or 10 percent, in 2012, said James Breitenstein, CEO of Landsmith, a San Francisco-based single-family rental firm that sold most of its 250 Phoenix rental houses last year.


“There are a lot of properties out there, so the competition to get your property rented is fierce,” Svoboda said. “Tenants are very savvy. If you’re overpriced by $25, they’ll let you know and go to another one around the corner.”

The buy to rent strategy could very well down down as one of the most idiotic investment trends in years, and that’s saying a lot.

Full article here.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Its_the_economy_stupid's picture

Those that know me here know that I have said it before: Have you ever tried to manage 25 stand-a;lone rentals? It is a recipe for getting stripped. The law is tilted against the owner. The lazy ass "property managers" don't give a flying f---, all they care about is the vig. If you are not on the tenants every freakin' second you are toast.

This whole "buy to rent" is a hustle from day one. I said it before, and I'll say it again, and again.

Downtoolong's picture

Unless you're Blackstone and have access to government guaranteed loans and can flip the whole deal to some unsuspecting pension fund investor in a securitization before the shit hits the fan.

Wall Street, destroying markets around the world one scheme at a time.


Raymond K Hessel's picture

Tenant Landlord laws are skewed to the landlord for buildings with less than 4 apartments, thus the laws governing the tenant/landlord relationship for single family homes and condos favor the landlord.  I can throw out a tenant from any of my single family units within a few weeks or months, depending on jurisdiction.


cornflakesdisease's picture

I have rental properties in the hot houston market, and I can tell you, collecting your rent is a 50/50 proposition.  It takes about 60 days to get rid of a non-paying tenant and sometimes as long as 4 months if they now the law and can stall and delay on technical issues.  Then you have to repair several thousand dollars worth of damage.  My properties are not ghetto either, they are rich yuppies in Montrose, Houston.  People today know the system and work it.  being a landlord is no cake walk.

ArkansasAngie's picture

What you haven't learned is that you get them out of your apartment and then let them sue you.  In Texas you get to subtract all of your expenses from any of their court ordered winnings.  First they have to sue you.

I had a honest to goodness french whore once who had a dad gum attorney as a john.  I did everything by the book and lost big time.  Now I take the front door off the unit.  I turn the power off.  Whatever it takes.

Have 33 units now.  I've only had one month's non payment over the last 2 years.  I do do a criminal and credit background check. I've not had to initiate eviction against a single one.  I tell them of all their bills they pay each month they must first pay mine.  My tenants are most middle class and/or students.  And ... guess what ... they love me.  I maintain my apartments.  They refer their friends to me.


adr's picture

all it takes is one guy that gets pissed and cracks the gas line to the stove before he leaves. Try proving it wasn't just damage from moving the appliance. That happened to a building next to the one I used to live in.

People don't give a shit anymore because there are more than enough rentals available. Which is the point of the article. A criminal background check won't show if a person cares about you or not. A credit check is only good as long as they have a job.

When I rented my landlord tried raising my rent $100. I told him, "You're building is 50% occupied, if you want another check, fuck off." Also considering I brought six paying tenants to the building, I'd told him I'd take them with me. I left anyway and took two friends with me. Nobody likes their landlord.

Mrmojorisin515's picture

Have fun when that student loan bubble pops, me thinks you and many other landlords in cities depend on students

cornflakesdisease's picture

I have rental properties in the hot houston market, and I can tell you, collecting your rent is a 50/50 proposition.  It takes about 60 days to get rid of a non-paying tenant and sometimes as long as 4 months if they now the law and can stall and delay on technical issues.  Then you have to repair several thousand dollars worth of damage.  My properties are not ghetto either, they are rich yuppies in Montrose, Houston.  People today know the system and work it.  being a landlord is no cake walk.

otto skorzeny's picture

and my wife wonders why I have such a low opinion of humanity

rlouis's picture

It was Blackstone's Pete Peterson that helped put Timmy G. in Treasury.  He also managed some plunder out of the telecom collapse as I recall; I think he could hang with Rubin pretty easily.

zorba THE GREEK's picture

I own 1 stinken rental property, a house around the corner from me. The tenant is a deadbeat who doesn't

pay rent. It would take at least 90 days after they are 30 days late on their rent to throw them out.

The last rental property I had, the tenants beat me for 4 months rent. It is just not worth it.

If it weren't for the fact that my grandkids are

living there, I would have put the house up for sale long ago.


killallthefiat's picture

You need a good rental manager.  I tried to rent it myself as a rookie landlord.  I got terrible tenants.  Since then, I have a rental manager who has kept good tenants in, going into 3 years on one and into 2 year on the other.  She takes 10%, month after month, but will evict a deadbeat in no time flat.  (Had one of those under her several years ago.)

She is worth every bit of 10%. 

I sometmes lament putting $60k into a rental property, but otherwise I would have bought more gold juniors.


Raymond K Hessel's picture

I love how people think they automatically become Donald Trump as soon as they buy a home to rent.  It's amazing.  How does it work, that you can buy a building and now you know property management, lease negotiation, marketing, administrative law, zoning law, tenant law, inny-minny-miney laws, financing, real estate accounting (which is specialized), property taxes, ad volerem, etc etc fucking et cetera.

If you bought a hospital, does it make you a doctor?

If you bought a gas station, does that make you an auto mechanic?

If you bought any kind of business, does ownership endow you with proficiency?

Dr Benway's picture

In Australia at least, property investors (read speculators) are not actually doing buy-to-rent.


They are doing buy-to-flip-to-greater-fool, while the rent received does not even cover costs.

NuYawkFrankie's picture

Re I love how people think they automatically become Donald Trump...


Are we talking about Donald Trump the Serial Bankrupt here?

You know - the guy who made an art form outta stiffing - for 100's of $millions -  Pension Fund bond-holders of his failed enterprises?

Why that bloviating, blow-dried, bouffanted  blowhard is held up as some sorta paragon of business acumen remains a mystery to me to this day.

Pure Evil's picture

He's a celebrity, no matter how much a failure, con man, or buffoon, if you're a celebrity you command respect.

Look at Obama, he's a serial failure on all fronts, yet he's treated as a celebrity and receives all the esteem associated with that position in life.

From Wikipedia:

"A celebrity is a person who has a prominent profile and commands a great degree of public fascination and influence in day-to-day media. The term is often synonymous with wealth (commonly denoted as a person with fame and fortune), implied with great popular appeal, prominence in a particular field, and is easily recognized by the general public."

So you see, you don't really need to accomplish much of anything to be a celebrity, as long as the MSM shines its light of popular appeal on you, and you're easily recognized by the general public, you can just about get away with nearly anything.

Real Estate Geek's picture

It's bad when your own family does that. At least you have your grandkids near.

mkhs's picture

No, it is normal.  Family.

Its_the_economy_stupid's picture

I'm w you. Bring the market down to reality.

fonzannoon's picture

It's just another byproduct of Zirp. Same as dividend paying stocks. People are looking for a replacement of the interest income they used to get on bonds and cd's.

People are not doing this because they are stupid this time around. This time around they are desperate.

daveO's picture

They're being conned. The banks have a lot of inventory to unload. This is a 'pump and dump scheme' by the banks. The only decent money I ever made in rentals was appreciation, and I did all the work myself. Rents just broke even after damages. These investors will get their heads handed to them!

Divided States of America's picture

Check out the Canadian condo market. Everyone is buying to rent and using it to offset the mortgage payments, and they are levering up by buying 2 to 5 condos each. Right now the gravy is still coming in but watchout when rates creep higher.

James_Cole's picture

Check out the Canadian condo market. Everyone is buying to rent and using it to offset the mortgage payments, and they are levering up by buying 2 to 5 condos each. 

That gravy train ended for most a year or so ago, people are just trying to hold it all together now. Had an argument with a mortgage broker a couple years back, guy was so blinded he was making out that I was costing people recommending against. I said better to just throw it on an index and keep an eye out...worked alright! Not a lot of fun for people stuck trying to keep up with multiple properties while fighting for renters. Canadian housing market has been speculator driven for a ~decade.  

Number 156's picture

Its looking more and more like 2007 part deux.

LawsofPhysics's picture

So, do wages matter or not? Stupid fucks.

rayduh4life's picture

Apparently not in AZ.  I had a 4closure bizz down there for a few years - got out last spring.  They still do ridiculous mortgages in Phoenix.   While it's nice to think the big PE guys will get left holding this bag of odorous excrement, I'd bet against it.  YMMV.

Variance Doc's picture

Exactly.  I've told many o' people:  you cannot leverage rent.  Blank stares in return.  Stupid fucks....

TomGa's picture

Funny.  A house down the road from me was just bought and turned into a rental two days ago in a nice section of Atlanta.  And now we have a fresh REO on the corner as well.

DirkDiggler11's picture

Thrown in the Chinese that have been buying up all the mid-tier properties on the North end of Atlanta around Gwinnett and you have a recipe for true disaster.

Go Tribe's picture

And a lot of missing dogs and cats.

Prisoners_dilemna's picture

Wow. I needed this very article today. I told some family to read up on the cyprus event and start to think again about wealth preservation. One suggested getting into rental properties. Now I can at least give him this to ponder.

If you start accepting BTC in your donation link I'll send you some.

uncle_vito's picture

Buy farmland.   Specifically orange ranches in Calif.   $600k buys you 40 acres that net you $100k a year.  Look up Booth Ranches, Paramount Citrus.   Those wealthy owners know what they are doing.   Residential RE is for muppets.

Go Tribe's picture

Not in the Midwest. You buy farmland when it just looks like a muddy field and not an investment.

Nid's picture

So when the rents don't cover the expenses they just hold on to the properties, not dump them on the market wholesale, right?

Real Estate recovery...

Its_the_economy_stupid's picture

If you r a bank, maybe yes.

Hedgies are forced to mark to market, and maybe dump the losers.

Number 156's picture

What will probably happen, is the Hedgies will be forced to sell, and the banks will buy up the supply. They can now act against all moral hazard and will be fully backed by the fed. They wont loose a cent.

Then, the government will begin either bulldozing homes that the banks write off as losses, or coming up with some sort of low income housing scheme to buy votes.

History Lesson:

W74's picture

I'm hoping for this.  What's great is other investors will see "bargains" all the way down.  When their business models are far more competitive then the old business models they can then charge less rent than before, keeping the whole thing in a nice downward cycle.  We might actually see a revovery and housing become affordable.

Oh, and New Construction (mostly apartment complexes for rent and townhomes for sale) is the bulk of "the market" these days.  Those will all tank too.  You can buy two somewhat beat up SFH's where I'm at for the price of one new townhouse.  Even the ones that've been up for over a year are still largely empty and the prices are ridiculous (no wonder) yet more are still going up.  I can't wait for development to halt.

On a side note: Anyone flew into Vegas at any point during the last 5 years and looked out the window?  Empty lots, and sometimes paved roads with cul-de-sacs but no structures.  Hilarious.

ForTheWorld's picture

In Australia, rents rarely cover the expenses (mortgage, repairs, insurance, land rates etc.). This is apparently an awesome thing for people who invest in property because you write this off when it comes to tax time. If you ask property "investors" in Australia, people are lazy if they don't own property, they're selfish if they want to find a place to inhabit in an area they want to live in (I'm serious about this), and negative gearing is absolutely the best thing ever.

I even heard one guy telling about guy about buying properties to rent out, and how he has switched his loans to interest only, and that's a good thing, because you rely on the capital gains. I didn't want to butt in and tell them that I'm watching property prices dropping throughout the city, and if you rely on capital gains, you'll be waiting a long time.

Nu Yawks hottest club is's picture

Ditto that for the UK and Ireland.

algol_dog's picture

Someone needs to pay for all this ... That's all I'm gonna say ~

sitenine's picture

I've often wondered, if someone can't afford to buy, how come they can afford to rent for more? Thanks for clearing this all up for me.

W74's picture

Never could figure that out.  I guess it's a matter of perspective.  Those who were paying $3,000-4,000/mo. on a mortgage see a townhouse rental for $1,700 or a SFH for $2,100 as a bargain.  In Maryland those prices are typical. 

People who have a kids see renting a house as a must and I'd have to agree with them since ghetto apartment complexes are not a healthy environment to raise children in.  As long as they don't move too often the kids will never know the difference.  So sad, too bad that they couldn't save up a downpayment for a house, but my next door neighbors (for example) are renters (at leas they're quiet) and have a Lincoln Navigator and an F-250 in their driveway.  I'd hate to see their gas bill, but we all make choices in life don't we?

Considering that a lot of mortgages were no down and a lot more were interest-only (or both) those people "losing" their homes were effectively renting anyway and had little to no equity socked into the property. 

Honestly I don't feel sorry for them any more, especially those who lost Gawkey McMansions when a Rancher in a decent mostly White working class area with a half decent school would've been quite affordable.  Don't bite more than you can chew.  Think about it, if people had just bought half the house and saved the difference they would have a few years worth of mortgage payments to tide them over.  So sad, too bad if they didn't do that during the good years when jobs were plentiful.

Water Is Wet's picture

I can't speak to the people you are talking about, but transaction costs on real estate are expensive, around 6%.  If a person doesn't plan on staying long enough, renting makes sense.  If a person moves frequently, houses would just be a pain in the ass.

Bear's picture

And now +3.8% thanks to Obamacare

HowardBeale's picture

Owning rentals, other than a managable complex of size, is a hands on--full-time--job that is, in essence, a lifestyle; one that no reasonable person who has some interest in actually living his life would consider. By the time you've made your nut on the "investment," your life is over...

Son of Loki's picture

Flood of rentals is right. In my area not only are Landlords giving "incentives" to rent their house but tenants are requesting (and getting it) 10% reductions on their rent. Property taxes soaring 5% on top of school tax increases for increased school security, etc. plus soaring maintenance costs and utility increases make RE a risky investment.


When a landlord wants to raise rents, the tenant simply moves out. This can cost the landlord a years profits --cleaning, fixing, re-renting, weeks if not months of vacancy and so on. I was a landlord once for a townhome and it turned into a Nightmarish black hole of money loss.