Rental Property Investors Aren't All the Same

A recent article from writer David Dayen titled "One Percent's Rental Nightmare: How Wall Street's Scheme Blew Up in Its Face," makes some very valid points about how the institutional and corporate rental real estate investment firms have screwed up the market and their bondholders' investments.

With Blackstone Group as the primary example in the article, the point is that big investors have purchased tens of thousands of foreclosed homes and converted them to rentals, but they're not getting the results they expected. Even worse, in typical Wall Street fashion, Blackstone Group very quickly packaged their rental property revenue streams into securities sold to other investors.

I've written previously about how these major investors are in my opinion mismanaging these properties and causing their tenants to flee their units. Some of the commentary from tenants and analysts about management problems focuses on:

  • Extremely landlord-biased lease agreements with unexpected and egregious requirements placed on tenants.
  • Poor or no response to complaints and maintenance requests.
  • Continued pursuit of past tenants for uncollected rents when they moved due to problems with their units.

A case used as an example is a couple in Los Angeles who referred to their home as "slum-like," with references to mold and rotted plumbing. The couple became ill from the mold and had to leave their belongings in the home for months before they could get them back. Months after they moved out due to these issues, they were allegedly still being pursued by Invitation Homes (Blackstone's single family rental entity) demanding back rent for the months left on their lease when they vacated.

The obvious public relations issues are just an indicator of the main problem; you can't manage rental properties like you run a factory. People may put up with a lot when it comes to incidental purchases or non-essential investments. However, when it comes to their homes, people are far less tolerant of sub-standard conditions and service.

As could be expected with a corporate topside-down approach to property management, vacancy rates in Invitation Homes properties are significantly higher than the norm in most markets. So far, I'm OK with all of the content of this article and the conclusions drawn. Unfortunately, there is a huge misconception that could be drawn from the content. The article refers frequently to "investors," as a group. With various estimates showing that Blackstone Group owns somewhere over 45,000 properties, that's just a tiny sliver of all rental homes.

Even if you count all of the smaller institutional and corporate investors scooping up properties, all of them added together don't rise to a noticeable percentage of the 14 million rental properties in this country. Small and mom-and-pop investors still own the majority of single family rental homes. They have their nest eggs and retirement wrapped up in these properties, and they're far more interested in excellent tenant relations than the big players. The difference between the 3 percent-4 percent or so national rental vacancy rate and the 7 percent-plus rate currently reported for Invitation Homes is rough on their bottom line and their bondholders. However, for the small investor owning 1 to 10 properties, it would be a really damaging hit on their expected return on investment.

It's easy for the average reader of the article to make a broad judgment about rental property investors and landlords based on the data presented. While it's accurate, it represents a tiny percentage of the overall single family home rental market, and unintentionally could malign a very large group of hard-working Americans who have tied up their life savings in rental property and manage it efficiently and with tenant satisfaction as a primary goal.