Individuals and Institutions Turn Single-Family Homes Into Rentals: Fannie Mae’s Duncan

The housing market is drawing individual investors and hedge funds that buy distressed properties from banks and servicers and rent them out, Douglas Duncan, chief economist at Fannie Mae, tells Aleksandrs Rozens. Duncan says the credit crisis has changed how investors value mortgage securities because many assumptions about prepayments have changed.

Q: When it comes to distressed residential investments where is the bulk of the interest coming from? Is it private equity funds or individuals?

A: It’s really a whole range. It’s some private individuals, some of whom may not have been in the rental business before but see an opportunity in their community. There are others who have a longer history — a private person or an LLP — a small, one- or two-person shop that has had a long history in rentals. Then there are hedge funds and also institutional investors who are looking at rentals as an opportunity in distressed  property. Some of them are traditional flippers who buy, repair and put back on the market — people who have a lot of market-specific knowledge. Some of them do the buy-and-hold strategy, anticipating getting a cap rate based on the rent, and ultimately, perhaps some capital gain. Some do both of those. The difference between them and the hedge funds is likely to be the amount of discount that they’ll require to get their return on capital. The institutional investors have a higher return-on-capital target. Numbers I’ve heard are 18 to 22 percent, but I’m not sure what the average expectation would be. Somewhere around the 20 percent range is probably reasonable.

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