Private equity flocks to foreclosed homes

Private equity is flocking to get its share of 200,000 foreclosed homes that the government wants to sell as rentals.

Rentals produce cash flows and Oliver Chang, Morgan Stanley analyst, says that such properties yield 8.1% on average calculated from 1990.

Federal Reserve report also calculates a similar rate of return.

“Preliminary estimates suggest that about two-fifths of Fannie Mae’s REO inventory would have a cap rate above 8 percent — sufficiently high to indicate renting the property might deliver a better loss recovery than selling the property,” says Fed paper.

Single home rentals produce 3% higher returns then apartments.

“This will be a new institutional asset class in the next 24 months,” says Gregor Watson, principal of McKinley Capital Partners.

“When you think about the number of homes that are going to be rented and institutionally owned, they’re going to become its own asset class,” notes Thomas Shapiro of GTIS Partners.

The idea behind this plan is to remove the inventory of the foreclosed property from the books while reducing lenders’ losses on foreclosed and surrendered properties and curb declines in home prices.