In a piece called Positioning for a Housing Recovery PIMCO says that the risks to housing have been overstated and while prices may continue to fall there are opportunities in the mispricing of that risk. They believe that the risk of the 11 million underwater home loans all becoming delinquent and going into foreclosure is much lower than most think. They also point out that the record low interest rates have created housing demand from large institutions (Like PIMCO, and individual investors too) searching for positive returns.
One of the opportunities they list is in apartment building investment, either through equity (owning) or debt (loaning). However they pass over multifamily in favor of REOs-to-rentals and distressed housing debt. It’s ironic that they would favor buying large numbers of single family homes to rent because the logistical nightmare of the scattered homes is what drives most real estate investors to apartments and other commercial real estate. The convenience of having 10, 20, even 200 units or more at one location on a single property on top of the economies of scale available make owning multifamily a much better investment.
While they do acknowledge the challenge of REOs-to-Rentals:
However, investors must be mindful of the operational complexity and illiquidity of a single-family rental portfolio. Managing a nationally diversified portfolio of rental properties presents unique challenges of surveillance and scaling, and procedures for maintenance and leasing must be designed to help protect earnings.
… Somehow that doesn’t lead them to picking multifamily investment. Are you a real estate investor who started out in single family properties and moved on to apartment buildings? We would love to hear your story-
Hat tip: The Big Picture blog
2 thoughts on “PIMCO calls bottom in housing, but likes REOs-to-Rentals over apartment building investments?”
I am not sure if this is a great idea, but I invested in single family units scattered really across the globe. My reason was to diversify the risk. Allow me to discuss my thinking a little. if for example I buy a apartment complex, if that geopgraphical space becomes economically downturn then I risk all my tenants being late on payments etc. If I have a scattered portfolio say one in Bangkok, two in different parts of the USA etc then my risk is like a diversified stock portfolio. Make Sense ?
Michael, I’d say as long as the homes are in places you want to visit often then it’s always a business expense when you go to your favorite places… but I’d also say it’s critical that each property has reliable, honest and efficient professional management in place or you will spend all your time running from place to place putting out fires.
There is a tradeoff between the diversification of scattered sites and the operating efficiency and economies of scale available to a single, larger property. But the risk isn’t all one way. There is the risk of being needed everywhere at once as I mentioned above but there are others too. Unless all the single family properties are secured by one loan, a vacancy at any of them means that occupancy goes to zero and the debt coverage is threatened where as with an apartment a few vacancies are built in to the financial model and won’t threaten the viability of the property. I would advocate having apartment building investments in the different markets you like rather than single families.