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Editor’s Note: Dennis Fassett is a former corporate finance executive turned real estate investing “Cash Flow Mercenary.” Dennis specializes in single-family and multi-family cash flow properties and thoroughly enjoys assisting his fellow investors with their own strategies, including how to buy your first apartment building.
As an ongoing contributor to Mogul’s “Market News Updates,” Mr. Fassett provides us with his own unique, lively, and thought-provoking commentary on the timely industry news and events of today that are impacting our industry. And be sure to check out his other super-helpful Market News Updates. For now, enjoy...
From Dennis Fassett, Cash Flow Mercenary...
I’ve written a couple of lessons in this space about Blackstone entering the rental real estate market and the impact it might have on the overall market…
As it turns out, they’re finding that it’s not as easy as they thought it would be to go out and buy a ton of rental houses throughout the country and hold and manage them and wait for the market to turn around before they dumped them.
I read an article the other day about this. It talked about why Blackstone isn’t getting the performance out of its rental portfolio that that it expected, and how the performance it’s getting is far below that of “mom-and-pop” investors. The piece also talked about why that’s happening.
The article stated that:
“Residential rental property investing has always been a stable long term investment strategy for investors who want steady cash flow and appreciation in asset value as well. It's also a great way for the small investor to get started. In fact, small investors account for around 95%+ of all residential rental property owners1. This is despite the surge in institutional and big player investing that became quite popular in 2013.”
No AAA Rating for YOU
It went on to say that Blackstone spent $7.5 billion on about 40,000 homes, taking advantage of the super-low prices post-crash.
Working with Deutsche Bank, Blackstone planned a bond offering in late 2013 based on the rental income generated by these properties. Fitch Ratings wouldn't consider a AAA rating on these bonds due to "concerns about investors' recovery prospects in the event of a bankruptcy and the lack of a track record that owners can profitably manage large numbers of scattered homes..."
Blackstone’s $479 million bond offering was released in late 2013, and was widely advertised as a welcome new source of capital and a great deal for investors. The bonds were easily sold, and Blackstone had estimated a 95% occupancy rate to guarantee a great return for investors.
Things haven't quite panned out as expected, however. The performance of the portfolio over a recent three-month period showed why:
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An 8.3% vacancy and delinquent rate instead of the expected 5%.
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Expiring leases and early tenant departures were cited as primary reasons for lower occupancy.
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Rental income over the three month period fell by 7.6%, assumed to be primarily due to the need to reduce rents to keep units occupied when leases expired.
An article at MotherJones.com cited troubles in tenant relations and increased rents that have contributed to early departures and even some lawsuits. The article states that in Charlotte, NC, Invitation Homes (Blackstone's rental property unit) had raised rents by as much as a third and filed eviction proceedings against nearly 10% of its renters.
So, what's the deal?
The article went on to say that if tens of thousands of small mom-and-pop investors have proven the success of single-family rental home investment, why haven't the financial wizards done better instead of struggling with these problems?
The article adds they thought that Fitch Ratings was wise in understanding the problems that these companies would face in trying to maintain and manage properties spread across multiple states. It isn't easy. The small investor has, for many years, known that they are most successful in rental property investment when they stay close to home.
When you're concentrating your rental properties in areas near where you live, you can monitor them better, drive by and visit to check the condition, and you can respond better to tenant requests and maintenance issues. When you excel at serving your tenants, you see far fewer problems with early tenant departures, non-payment of rent, and disputes over condition and repair issues. You also normally have a pretty good handle on your local market, population demographics, and who will pay and how much they'll pay to live where you own properties.
Staying close to your customers is good for any business.
The article concluded by asking:
“Have the big players made it more difficult for the small investor?”
They thought yes, considering that their large purchases have helped to raise prices.
However, the author also wrote that:
“…if they don't figure out how to deal with the many widely dispersed properties, improve their management and collections, and get more positive tenant relations news reported, they're not hurting the small investors much at all. We'll see, but my money is on a healthy rental investment market for the small investor well into the future.”
Blackstone isn’t in my market at all. Based on how they’re handling their tenants though, I wish they were!
Gimme a shout
What do you think about how Blackstone handled things? Share in the comments section below.
Dennis Fassett
earned a BS in Economics and followed that up with an MBA in finance. After working and corporate finance and banking for several years, he started buying single family houses, and quickly built a very nice portfolio of cash flowing rentals. When the credit markets started to dry up and he couldn’t get any additional single family mortgages he shifted his focus to apartment buildings. He now has over $3 million in rental real estate. He manages most of it his self and still has a day job. Dennis has even created his own Private Equity fund to buy apartment buildings.