If your goal is to lose money, go with the hot hand: invest in
the dominate theme, the latest fad, the newest investment
Unfortunately, popularity has the same influence on investors
as a flame has on a moth. Meaning that it draws them in and
I've seen it time and time again. Money that wasn't lost
investing in Japanese stocks in the 1980s was lost investing in
Internet stocks in the 1990s. Money that wasn't lost in Internet
stocks was subsequently lost in residential real estate in the
And if there's any money left, it's set to be lost all over
again in real estate.
This time, losses will accumulate in residential rental real
estate. I'm convinced money will be lost because of the torrent
of new investments large institutions have devised to capitalize
on the "residential rental" thesis.
You might be familiar with the pitch. It is simply this:
underwriting standards are tight, so more people are forced to
rent. This pushes rental rates higher, which in turn leads to
lower vacancies and higher rental housing values.
about an apartment rental REITs. These are some of the lowest
yielding REITs. And there are many new apartment REITS that have
come public the past couple years to exploit the rental
But there's an even more dangerous REIT, one focused on
single-family homes. Large institutions are buying large swaths
of single-family homes, rehabbing them, and renting
Now these large institutions are tapping public equity markets
to let you participate in their good fortune (or a cynic - and
I'm one - might say, to cash out to suckers).
Silver Bay Realty Trust Corp (
American Residential Properties (
US Masters Residential Property Fund (ASX: URF)
have had IPOs this year.
Investors who got in at the ground floor are hardly
Silver Bay is down 9% from its IPO price and American
Residential Properties is down 20%. As for US Masters, it's a
penny stock that trades on the Australian Stock Exchange and is
up 19% to a whopping $1.90 a share.
And more IPOs are on the way. These include:
- American Homes 4 Rent - the second-largest owner of
single-family rental properties with 10,000 properties
- Colony American owns 9,900 properties, making it the third
largest home owner
- Waypoint Homes Realty Trust - #5 in terms of home
ownership, with 3,500 rental properties, filed for a $100
It's only a matter of time before
Blackstone Group (
- the biggest homeowner with 25,000 homes - has an IPO for its
Invitation Homes unit.
The popular investing thesis I shared sounds logical and
enticing. But it's one that's well known today. Nearly every
investor understands the opportunity. And for that reason,
the opportunity is fully priced.
More important, the thesis fails to tell the full story. Yes,
underwriting standards are tight, but people are getting loans.
Indeed, conforming loans below $417,000 are readily available.
Year over year, mortgage loans are up 12%.
In addition, data collected by Fannie Mae and Freddie Mac show
Americans overwhelming prefer to own than rent. Why would anyone
be surprised? Neighborhoods composed of owner-occupied homes are
more stable and hold their value better than neighborhoods
composed of renters.
As for the thesis of perpetually rising rents, ignore it. In
my opinion, we're approaching a top, if we haven't reached one
Nationwide, landlords increased rents an average of 0.7% to
$1,062 in the second quarter. The increase is slightly above the
0.6% increase posted in the first quarter, but it's well below
the 1.3% rise one year ago.
The vacancy rate, meanwhile, held steady at 4.3% in the second
quarter. Standing pat means the rental market experienced the
first quarter since early 2010 when vacancy rates haven't
The single-family rental market is poised to disappoint,
because popularity always disappoints. Give me a popular
investing thesis, and I'll give you an account of investor
heartache and misery.