The New Growth Business: Becoming a Landlord
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The Fiscal Times
March 7, 2012

After years of losses and disappointments, those hoping to make a buck in U.S. real estate are back. Investors from Warren Buffett to mega financiers like GTIS Partners to small-time wholesalers are looking to cash in on the U.S. housing market. Though home prices have continued to fall in most parts of the country, a rapidly improving rental market has prompted many investors to become landlords.

2011 was a banner year for rentals because of improving demand, slow growth in new apartment construction, and low interest rates, according to a January report from real estate research firm Green Street Advisors. U.S. Labor Department data show that rents rose 2.5 percent last year. For 2012, Green Street predicts growth in monthly rents of 3 to 7 percent, depending on the local market.

That plus lower prices have made distressed properties look much more appealing this year, say real estate insiders. The median price that investors paid in 2011 for a house was $95,000, almost 11 percent less than in 2009, according to numbers from the National Association of Realtors (NAR). With prices down and rents up, buy-and-hold investors—those who purchase, fix up, and then rent out houses—are more likely to see positive cash flow.

RELATED: Big Investors Snatch Up America’s Housing Market

The federal government has further stoked investors’ interest with its new plan to stabilize the market by selling off some of the 210,000 foreclosed properties on the books of Fannie Mae, Freddie Mac, and the Federal Housing Administration. In February, the government issued invitations to groups of large investors to apply for permission to buy these foreclosed homes in bulk, through a sealed auction, in distressed areas like Florida, Las Vegas, and Phoenix. The first 2,500 foreclosures went up for sale on February 27. Program rules say that whoever wins these bids must hold and manage the properties as rentals for a “specified number of years.”

While that plan aims to stabilize distressed markets, many advocates worry about possible side effects. Deborah Goldberg of the National Fair Housing Alliance, a nonprofit that addresses housing discrimination, says she’s concerned that the plan won’t have a mechanism for correctly pricing the houses being sold off—prices that are too low could actually further drag down surrounding values, especially in marginal and minority neighborhoods.

Others worry that investors buying up multiple properties for rental income could push out individual homeowners. “If you’re a first-time buyer who keeps running into investors who are outbidding you or offering cash where you can’t, it’s not a positive thing,” says DataQuick’s Andrew LePage. But during a downturn, investors also clear out often-decaying properties, fixing them up for rental or resale. That might be why they’re often compared to animal-kingdom scavengers. For Crocker Liu, professor of real estate at Cornell University’s School of Hotel Administration, they’re like “catfish—they keep the ocean floor clean.” LePage calls them “the necessary vultures who keep the real estate ecosystem in balance. Otherwise you’d have more distressed properties lingering on the market longer.”

STEVE YODER writes about business, real estate and other domestic policy issues. His work has appeared in print and online at Salon, The American Prospect, Men's Health, The Crime Report, and elsewhere.