Rent? Own? or Own to Rent? (Part III)

“Because he wants to keep you living in his slums and paying the kind of rent he decides. Joe, you had one of those Potter houses, didn't you? Well, have you forgotten? Have you forgotten what he charged you for that broken-down shack? …. Can't you understand what's happening here? Don't you see what's happening? Potter isn't selling. Potter's buying! And why? Because we're panicking and he's not. That's why. He's picking up some bargains.”
George Bailey Quote from It’s a Wonderful Life.

Recently, the topic of the movie “It’s a Wonderful Life” came up in the course of a conversation. My friend quoted George Bailey, the hero of the movie as he tried to calm down an anxious crowd by noting that Henry F. Potter, the evil rich banker wasn’t selling into the panic. He was buying. It was one of those moments of understanding in which I felt a shot of electricity go through my body.

I’m here to report Henry Potter is buying.

The Blackstone Group is buying 15,000 single family homes in the Tampa, FL area. They already have up to $1 Billion in hand for this purpose. Their intention is to turn entire neighborhoods into rental communities. This financial service and asset management giant is making an unprecedented bet that our country is moving from an ownership society to a society of renters. The Blackstone Group is not alone. It is reported that KRR and Waypoint Homes are also buying up homes in the hard hit Tampa area. Blackstone will not be content to just be a slumlord. They are planning to monetize future rents from these properties into bonds or other financial instruments that will then be sold at a profit to retail customers. Once this happens they will be making a profit with little or no risk. The risk will have been transferred to the bond holders, mom and pop America.

Blackstone is not alone. Bloomberg reports, J.P. Morgan Chase is already into the hardest hit real estate markets in the country including Las Vegas, Florida, Arizona, and California. They are already moving ownership of these rental properties to some of their wealthiest clients. Somehow I bet they are being offered a better deal than I can get.

What is disturbing about these and other similar activities are not that Henry Potter (One of the American Film Institute’s top 50 villains) has seen an opportunity to take the money and run. What bothers me is that he is doing it at taxpayer expense. Many of these properties are owned by Fannie Mae, a quasi-public corporation created by Congress. There are well documented reports out there that some of these sales are real sweetheart deals, essentially giving these major corporations the opportunity to buy at 0% interest.

There are authors who believe that the opportunity to pick up cheap rental properties has already past. Again, there is an ebb and flow to the movement of money. Housing is subject to the laws of supply and demand just like any other commodity. There are a finite number of people with a finite supply of money who wish to live in a particular area with a finite number of houses. If there are more buyers than houses the price goes up. If there are more sellers than buyers the price goes down. If Henry Potter is still buying, I believe there is still some decent opportunities left on the table. When Henry Potter starts to sell those bonds to retail customers, then I will suspect that this little boomlet is over.

There is a way to invest in real estate without $1 Billion in cash or the specter of broken toilets in the middle of the night disturbing your slumber. They are called Real Estate Investment Trusts (REIT). Invetopedia defines a REIT as, “A security that sells like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages. REITs receive special tax considerations and typically offer investors high yields, as well as a highly liquid method of investing in real estate.”

As always there are dangers inherent in REITs. Share values move up and down with the underlying value of their assets. Needless to say REITs were pummeled the 2006-2009 meltdown. Those dividends also ebb and flow with rental market returns.

There are REITs available for just about any segment of the real estate market that interests you from humble storage units to prestigious office buildings. Your shares can be backed by either properties or mortgages. I own shares in one specialty REIT that is involved in the pulp and paper business as well as the development of retirement communities. Even through the crash it did OK. Now it seems to be waking up along with the nascent housing recovery.

Here is a link to a blog post by Charles Hugh Smith. I always enjoy his posts. He really makes me think about what I believe to be true. In this case, I disagree with his premise that the boom is over because I observe that Henry Potter is still buying properties. I include it because it contains a wealth of links to articles both from the traditional press and the blogosphere covering this subject from widely varying viewpoints.

The Crowded Trade Buy to Rent Housing