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Single Family REITs: A New Definition of Homeownership

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By Greg Rand

The most significant innovation to hit the residential real estate market in decades occurred in 2012 to little fanfare: A first single family REIT (real estate investment trust) went public. For the first time in history, everyday people can own shares of the American Housing Market, one share at a time. Not since the creation of the 30-year fixed mortgage did so much capital flow into the single family market as will flow into it in the next ten years, via single family REITs.

It can be said that all innovation begins with something that is missing, something that should exist in the world but doesn’t. Then someone recognizes that void and fills it. Single Family REITs (“SFRs”) are just such an innovation.

It is important to note that these are not investors obsessed with chasing discounted properties, but long term investors focused on the fundamentals of population growth, migration patterns, demographics, employment strength, quality of life, cost of living and responsible governance. They intend to build high quality portfolios of homes and hold them indefinitely. Since 1993, the beginning of the modern era of REITs, $400 billion has been deployed to acquire commercial property. Singe family is the asset class of choice for this new generation of REITs, and the capital invested is expected to be in the hundreds of billions in the coming years.

The implications could be incredible, including adding a new dimension to the concept of homeownership.

Consider this scenario: A family rents a great house they love on a street they love, amongst neighbors they are fond of in a school district they are committed to. They settle in and stay there a long time. They live in a home owned by a REIT, and accumulate shares of the very same REIT.

Are they homeowners? I say yes!

I believe that family will have pride in ownership. They will respect the home and take care of it. They will allow themselves to put down roots and stay for a long time. They will not be “throwing money away” on rent as many proponents of traditional homeownership would put it. They will pay their lease, let the REIT cover the repairs and maintenance costs, and stow money into the REIT portfolio one share at a time.

Imagine if instead of buying a $200,000 house with 20 percent down, a family opted to lease a $200,000 house and put the $40,000 into the REIT that owns it. They would own shares in a portfolio of thousands of houses, including their own. Their down payment money would be in houses, including their own, and be completely liquid.

They would also enjoy stable dividends and capital appreciation. REITs are an extraordinary financial structure that was designed to complement the natural character of real estate. In a nutshell, REITs are exempt from federal income tax, but there are strings attached. They are required to invest 75 percent of their assets into real estate, and distribute 90 percent of their profits to shareholders as dividends. The end result is a structure that performs well over the long term. REITs are not permitted to furiously trade their assets. The good ones buy intelligently, manage efficiently and hold for the ages. They are not volatile, but boring in a way that is very sexy to people who want to create dependable wealth.

Some have expressed concern over how this level of institutional attention could negatively impact the housing market, and they are right to be concerned. If recent history is any guide, institutions running amuck in the housing market only produce bad outcomes for everyone involved. They trample on the proverbial garden, and then move on to trample on another when their hungers are satisfied.

I personally share this concern over the breed of investors who approach single family investing as a trade instead of as a business. Traders buy low and sell high. They sometimes ignore fundaments and are seduced by opportunities that, due to timing and circumstance, offer perceived discounts. Then they wait for timing and circumstance to change in their favor, and sell.

Business builders don’t approach building a single family portfolio that way, but ask questions like:

“Who is the best customer? Which ones will pay a premium for quality?

What kind of product do they want, and where do they want them?

What kind of customer service experience will engender enduring loyalty?”

And my personal favorite, “How can we incentivize them to buy shares in our portfolio so they have skin in the game and feel true pride in ownership?”

The business builders in this space recognize that this is about competing for the best customers.

One more concern that warrants a response: The idea that investors are driving prices up on first time buyers and making homeownership harder for them to achieve.”

True, competition for houses will drive prices up, but I believe that’s the way we want it. Gradually escalating home values are normal, so long as population continues to gradually escalate. It’s when home prices go down that all hell breaks loose.

Single Family REITs provide a path to homeownership to everyone with a minimum down payment of one share. In this way, it is lowering the barrier to homeownership – to $100.

Greg Rand (@gsrand) is the CEO of OwnAmerica and host of “Rand on Real Estate” on 770 WABC.

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